Business Finance
It would be an addition to property, plant and equipment, so it would be an investing activity.
Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows? It would be an expense on the income statement, so it would be reflected in operating cash flows. It would be an addition to property, plant and equipment, so it would be an investing activity. It would be an addition to cash, so would be reflected in the change in cash. It would be an addition to current assets. None of the above answers is correct.
the risk of receiving payment on its accounts.
Assets presented on the balance sheet are in order of accounting liquidity. Accounting liquidity refers to: the risk of receiving payment on its accounts. ability and time it takes to convert assets to cash. how much inventory a brewer keeps. the ability to sell its product. None of the above.
14.13 times
Your firm has sales of $628,000 and cost of goods sold of $452,000. At the beginning of the year, your inventory was $31,000. At the end of the year, the inventory balance was $33,000. What is the inventory turnover rate? 11.23 times 12.56 times 14.13 times 19.63 times 29.06 times
current assets/current liabilities
current ratio
365/inventory turnover
days sales in inventory
total debt/total equity
debt-equity ratio
market value per share/book value per share
market to book ratio
EBIT/ Intereset
times interest earned ratio
365/receivables turnover
Days' sales in receivables
price per share/earnings per share
PE ratio
10.12 percent
Southern Home Cookin' just paid its annual dividend of $0.65 a share. The stock has a market price of $13 and a beta of 1.12. The return on the U.S. Treasury bill is 2.5 percent and the market risk premium is 6.8 percent. What is the cost of equity? 9.98 percent 10.04 percent 10.12 percent 10.37 percent 10.45 percent
profit margin.
The financial ratio measured as net income divided by sales is known as the firm's: profit margin. return on assets. return on equity. asset turnover. earnings before interest and taxes.
I, II, and IV only
An increase in which of the following will increase the current value of a stock according to the dividend growth model? I. dividend amount II. number of future dividends, provided the current number is less than infinite III. discount rate IV. dividend growth rate I and II only III and IV only I, II, and III only I, II, and IV only I, II, III, and IV
cash budget.
The forecast of cash receipts and disbursements for the next planning period is called a: pro forma income statement. statement of cash flows. cash budget. receivables analysis. credit analysis.
All of the above.
To calculate sustainable growth rate without using return on equity, the analyst needs the: profit margin. payout ratio. debt-to-equity ratio. total asset turnover. All of the above.
$9,295.92
Todd is able to pay $175 a month for five years for a car. If the interest rate is 4.9 percent, how much can Todd afford to borrow to buy a car? $6,961.36 $8,499.13 $8,533.84 $8,686.82 $9,295.92
43.37 days
Weson, Inc. has sales of $462,000, costs of goods sold of $308,000 and average accounts receivable of $54,900. How long does it take its credit customers to pay for their purchases? 36.09 days 38.63 days 41.23 days 43.37 days 57.95 days
Paying your suppliers earlier to receive the discount they offer
Which one of the following will increase the cash cycle? Improving the cash discounts given to customers who pay their account early Having a larger percentage of customers paying with cash instead of credit Buying less raw materials to have on hand Paying your suppliers earlier to receive the discount they offer Ordering raw materials inventory only when you need
6 percent interest for five years
Which one of the following will produce the highest present value interest factor? 6 percent interest for five years 6 percent interest for eight years 6 percent interest for ten years 8 percent interest for five years 8 percent interest for ten years
operating cash flow
Which term relates to the cash flow, which results from a firm's ongoing, normal business activities? operating cash flow capital spending net working capital cash flow from assets cash flow to creditors
payback and discounted payback
Which two methods of project analysis are the most biased towards short-term projects? net present value and internal rate of return internal rate of return and profitability index payback and discounted payback net present value and discounted payback discounted payback and profitability index
$119.52
You are purchasing a 25-year, zero-coupon bond. The yield to maturity is 8.68 percent and the face value is $1,000. What is the current market price? $106.67 $108.18 $119.52 $121.50 $128.47
II and IV only
A bond has a market price that exceeds its face value. Which of the following features currently apply to this bond? I. discounted price II. premium price III. yield-to-maturity that exceeds the coupon rate IV. yield-to-maturity that is less than the coupon rate III only I and III only I and IV only II and III only II and IV only
sales.
A common-size income statement is an accounting statement that expresses all of a firm's expenses as percentage of: total assets. total equity. net income. taxable income. Correct! sales.
perpetuity payments never cease.
A perpetuity differs from an annuity because: perpetuity payments vary with the rate of inflation. perpetuity payments vary with the market rate of interest. perpetuity payments are variable while annuity payments are constant. perpetuity payments never cease. annuity payments never cease.
5.08 percent
Blackwell bonds have a face value of $1,000 and are currently quoted at 98.4 percent of par. The bonds have a 5 percent coupon rate. What is the current yield on these bonds? 4.67 percent 4.78 percent 5.08 percent 5.33 percent 5.54 percent
8,837.34
Bradley Snapp has deposited $7,000 in a guaranteed investment account with a promised rate of 6% compounded annually. He plans to leave it there for 4 full years when he will make a down payment on a car after graduation. How much of a down payment will he be able to make? $1,960.00 $2,175.57 $8,960.00 $8,837.34 $9,175.57
net income/shares outstanding
EPS
helps ensure that proper financing is in place to support the desired level of growth.
Financial planning, when properly executed: ignores the normal restraints encountered by a firm. ensures that the primary goals of senior management are fully achieved. reduces the necessity of daily management oversight of the business operations. helps ensure that proper financing is in place to support the desired level of growth. eliminates the need to plan more than one year in advance.
profit margin, the payout ratio, the debt-to-equity ratio, and the asset requirement or asset turnover ratio.
Sustainable growth can be determined by the: profit margin, total asset turnover and the price to earnings ratio. profit margin, the payout ratio, the debt-to-equity ratio, and the asset requirement or asset turnover ratio. Total growth less capital gains growth. Either A or B. None of the above.
beta
Systematic risk is measured by: the mean. beta. the geometric average. the standard deviation. the arithmetic average.
6.22 percent
The Purple Martin has annual sales of $687,400, total debt of $210,000, total equity of $365,000, and a profit margin of 5.20 percent. What is the return on assets? 6.22 percent 6.48 percent 7.02 percent 7.78 percent 9.79 percent
6.14 percent
The bonds issued by Stainless Tubs bear a 6 percent coupon, payable semiannually. The bonds mature in 11 years and have a $1,000 face value. Currently, the bonds sell for $989. What is the yield to maturity? 5.87 percent 5.92 percent 6.08 percent 6.14 percent 6.20 percent
discount rate which causes the net present value of a project to equal zero
The internal rate of return is defined as the: maximum rate of return a firm expects to earn on a project. rate of return a project will generate if the project in financed solely with internal funds. discount rate that equates the net cash inflows of a project to zero. discount rate which causes the net present value of a project to equal zero. discount rate that causes the profitability index for a project to equal zero.
discounted payback period.
The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a project is referred to as the: net present value period. internal return period. payback period. discounted profitability period. discounted payback period.
operating cycle.
The length of time between the acquisition of inventory and the collection of cash from receivables is called the: inventory period. operating cycle. accounts payable period. accounts receivable period. cash cycle.
accounts payable period.
The length of time between the acquisition of inventory by a firm and the payment by the firm for that inventory is called the: operating cycle. inventory period. accounts payable period. accounts receivable period. cash cycle.
The payback decision rule could override the accept decision indicated by the net present value.
Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1 percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required payback period is 3.0 years. Which one of the following statements correctly applies to this project? The net present value indicates accept while the internal rate of return indicates reject. Payback indicates acceptance. The payback decision rule could override the accept decision indicated by the net present value. The payback rule will automatically be ignored since both the net present value and the internal rate of return indicate an accept decision. The net present value decision rule is the only rule that matters when making the final decision.
$5,637.09
What is the future value of $1,000 a year for five years at a 6% rate of interest? $4,212.36 $5,075.69 $5,637.09 $6,001.38 $6,801.9
II and IV only
Which of the following are current assets? I. patent II. Inventory III. accounts payable IV. cash patent I and III only II and IV only I, II, and IV only I, II and III only II, III, and IV only
accounts receivable
Which one of the following accounts is the most liquid? inventory building accounts receivable equipment land
A stock's value is equal to the discounted present value of the future cash flows which it generates
Which one of the following is an underlying assumption of the dividend growth model? A stock has the same value to every investor. A stock's value is equal to the discounted present value of the future cash flows which it generates. A stock's value changes in direct relation to the required return. Stocks that pay the same annual dividend have equal market values. The dividend growth rate is inversely related to a stock's market price.
dividend yield
Which one of the following is computed by dividing next year's annual dividend by the current stock price? yield to maturity total yield dividend yield capital gains yield growth rate
balance sheet
Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date? income statement creditor's statement balance sheet statement of cash flows dividend statement
unsystematic risk
Which one of the following risks is irrelevant to a well-diversified investor? systematic risk unsystematic risk market risk nondiversifiable risk systematic portion of a surprise
18.63 percent
Oscar's Dog House has a profit margin of 5.6 percent, a return on assets of 12.5 percent, and an equity multiplier of 1.49. What is the return on equity? 17.14 percent 18.63 percent 19.67 percent 21.69 percent 22.30 percent
pro forma statements.
Projected future financial statements are called: plug statements. pro forma statements. reconciled statements. aggregated statements. none of the above.
The cash flow in year two is valued just as highly as the cash flow in year one.
A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project? The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted. The cash flow in year three is ignored. The project's cash flow in year three is discounted by a factor of (1 + R)3. The cash flow in year two is valued just as highly as the cash flow in year one. The project is acceptable whenever the payback period exceeds three years.
$82,550
Andre's Bakery has sales of $687,000 with costs of $492,000. Interest expense is $26,000 and depreciation is $42,000. The tax rate is 35 percent. What is the net income? $42,750 $44,450 $82,550 $86,450 $124,550
internal growth rate
ROA x b/ (1 - ROA x b)
reduces both taxes and net income.
Depreciation: reduces both taxes and net income. increases the net fixed assets as shown on the balance sheet. reduces both the net fixed assets and the costs of a firm. is a noncash expense which increases the net income. decreases net fixed assets, net income, and operating cash flows.
8.31 days
Drefus, Inc. has an inventory turnover of 16 and an accounts receivable turnover of 10. The accounts payable period is 51 days. What is the length of the cash cycle? 8.31 days 9.57 days 10.07 days 11.23 days 12.79 days
$95 use of cash
During the year, Kitchen Supply increased its accounts receivable by $130, decreased its inventory by $75, and decreased its accounts payable by $40. How did these three accounts affect the firm's cash flows for the year? $245 use of cash $165 use of cash $95 use of cash $95 source of cash $165 source of cash
$8.47
How much are you willing to pay for one share of Jumbo Trout stock if the company just paid a $0.70 annual dividend, the dividends increase by 1.6 percent annually, and you require a 10 percent rate of return? $8.29 $8.33 $8.47 $8.53 $8.59
has no debt of any kind.
If a firm produces a 10% return on assets and also a 10% return on equity, then the firm: has no debt of any kind. is using its assets as efficiently as possible. has no net working capital. also has a current ratio of 10. has an equity multiplier of 2.
assets - (liabilities + equity).
In the financial planning model, external funds needed (EFN) is equal to changes in assets - (liabilities - equity). assets - equity. (assets + liabilities - equity). (assets + equity - liabilities). assets - (liabilities + equity).
7.68 percent
Jerilu Markets has a beta of 1.09. The risk-free rate of return is 2.75 percent and the market rate of return is 9.80 percent. What is the risk premium on this stock (not just the market risk premium)? 6.47 percent 7.03 percent 7.68 percent 8.99 percent 9.80 percent
long term debt/long term debt + total equity
Long term debt ratio
the sustainable rate of growth.
Marcie's Mercantile wants to maintain its current dividend policy, which is a payout ratio of 40%. The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio. Given these requirements, the maximum rate at which Marcie's can grow is equal to: 60% of the internal rate of growth. 40% of the internal rate of growth. the sustainable rate of growth. the internal rate of growth. 60% of the sustainable rate of growth.
8.34%
Neal's Nails has an 11% return on assets and a 30% dividend payout ratio. What is the internal growth rate? 7.11% 7.70% 8.01% 8.34% 11.99%
is the best method of analyzing mutually exclusive projects.
Net present value: is the best method of analyzing mutually exclusive projects. is less useful than the internal rate of return when comparing different sized projects. is the easiest method of evaluation for non-financial managers to use. is less useful than the profitability index when comparing mutually exclusive projects. is very similar in its methodology to the average accounting return.
current assets minus current liabilities.
Net working capital is defined as: total liabilities minus shareholders' equity. current liabilities minus shareholders' equity. fixed assets minus long-term liabilities. total assets minus total liabilities. current assets minus current liabilities.
991.47
Oil Well Supply offers 7.5 percent coupon bonds with semiannual payments and a yield to maturity of 7.68 percent. The bonds mature in 6 years. What is the current price per bond if the face value is $1,000? $989.70 $991.47 $996.48 $1,002.60 $1,013.48
liability; total assets
On a common-size balance sheet, all _____ accounts are shown as a percentage of ____. income; total assets liability; net income asset; sales liability; total assets equity; sales
sustainable growth rate (external growth rate)
ROE x b / (1-ROE x b)
are based on the market value of the firm's debt and equity securities.
The capital structure weights used in computing the weighted average cost of capital: are based on the book values of total debt and total equity. are based on the market value of the firm's debt and equity securities. are computed using the book value of the long-term debt and the book value of equity. remain constant over time unless the firm issues new securities. are restricted to the firm's debt and common stock.
7.79 percent
The common stock of Auto Deliveries sells for $28.16 a share. The stock is expected to pay $1.35 per share next year when the annual dividend is distributed. The firm has established a pattern of increasing its dividends by 3 percent annually and expects to continue doing so. What is the market rate of return on this stock? 7.42 percent 7.79 percent 19.67 percent 20.14 percent 20.86 percent
8.65 percent
The common stock of Manchester & Moore is expected to earn 13 percent in a recession, 6 percent in a normal economy, and lose 4 percent in a booming economy. The probability of a boom is 5 percent while the probability of a recession is 45 percent. What is the expected rate of return on this stock? 8.52 percent 8.74 percent 8.65 percent 9.05 percent 9.28 percent
return on a perpetuity.
The cost of preferred stock is computed the same as the: pre-tax cost of debt. return on an annuity. aftertax cost of debt. return on a perpetuity. cost of an irregular growth common stock.
current assets divided by current liabilities.
The current ratio is measured as: current assets minus current liabilities. current assets divided by current liabilities. current liabilities minus inventory, divided by current assets. cash on hand divided by current liabilities. current liabilities divided by current assets.
assets divided by total equity.
The equity multiplier ratio is measured as total: equity plus total debt. equity divided by total assets. assets divided by total equity. assets plus total equity, divided by total debt. assets minus total equity, divided by total assets.
risk-free rate
The expected risk premium on a stock is equal to the expected return on the stock minus the: expected market rate of return. risk-free rate. inflation rate. standard deviation. variance.
profit margin.
The financial ratio measured as net income divided by sales is known as the firm's: profit margin. return on assets. return on equity. asset turnover. earnings before interest and taxes.
accounts receivable period.
The length of time between the sale of inventory and the collection of cash from receivables is called the: inventory period. operating cycle. accounts receivable period. accounts payable period. cash cycle.
All of the above.
The main objective of long-term financial planning models is to: determine the asset requirements given the investment activities of the firm. plan for contingencies or uncertain events. determine the external financing needs. All of the above. None of the above.
Both B and C.
The percentage of sales method: requires that all accounts grow at the same rate. separates accounts that vary with sales and those that do not vary with sales. allows the analyst to calculate how much financing the firm will need to support the predicted sales level. Both A and B. Both B and C.
marginal
The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate. mean residual total average marginal
is based on the current yield to maturity of the firm's outstanding bonds.
The pre-tax cost of debt: is based on the current yield to maturity of the firm's outstanding bonds. is equal to the coupon rate on the latest bonds issued by a firm. is equivalent to the average current yield on all of a firm's outstanding bonds. is based on the original yield to maturity on the latest bonds issued by a firm. has to be estimated as it cannot be directly observed in the market.
can be less than the weighted average of the standard deviations of the in individual securities held in that portfolio.
The standard deviation of a portfolio: is a measure of that portfolio's systematic risk. is a weighed average of the standard deviations of the individual securities held in that portfolio. measures the amount of diversifiable risk inherent in the portfolio. serves as the basis for computing the appropriate risk premium for that portfolio. can be less than the weighted average of the standard deviations of the in individual securities held in that portfolio.
is normally higher than the internal growth rate.
The sustainable growth rate: assumes there is no external financing of any kind. is normally higher than the internal growth rate. assumes the debt-equity ratio is variable. is based on receiving additional external debt and equity financing. assumes that 100% of all income is retained by the firm.
The longer the cash cycle, the more likely a firm will need external financing.
Which one of the following statements is correct concerning the cash cycle? A positive cash cycle is preferable to a negative cash cycle. Increasing the accounts payable period increases the cash cycle. The longer the cash cycle, the more likely a firm will need external financing. The cash cycle can exceed the operating cycle if the payables period is equal to zero. Adopting a more liberal accounts receivable policy will tend to decrease the cash cycle.
A project with investing type cash flows is acceptable if its internal rate of return exceeds the required return.
Which one of the following statements is correct in relation to independent projects? The internal rate of return cannot be used to determine the acceptability of a project that has financing type cash flows. A project with investing type cash flows is acceptable if its internal rate of return exceeds the required return. A project with financing type cash flows is acceptable if its internal rate of return exceeds the required return. The net present value profile is upsloping for projects with both investing and financing type cash flows. Projects with financing type cash flows are acceptable only when the internal rate of return is negative.
Annuity A has a higher future value than annuity B.
You are comparing two annuities, which offer monthly payments for ten years. Both annuities are identical with the exception of the payment dates. Annuity A pays on the first of each month while annuity B pays on the last day of each month. Which one of the following statements is correct concerning these two annuities? Both annuities are of equal value today. Annuity B is an annuity due. Annuity A has a higher future value than annuity B. Annuity B has a higher present value than annuity A. Both annuities have the same future value as of ten years from today.
You should accept the payments because they are worth $56,451.91 today.
You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $50,000 today or receive payments of $641 a month for ten years. You can earn 6.5% on your money. Which option should you take and why? You should accept the payments because they are worth $56,451.91 today. You should accept the payments because they are worth $56,523.74 today. You should accept the payments because they are worth $56,737.08 today. You should accept the $50,000 because the payments are only worth $47,757.69 today. You should accept the $50,000 because the payments are only worth $47,808.17 today.
90,182.79
You buy an annuity, which will pay you $12,000 a year for ten years. The payments are paid on the first day of each year. What is the value of this annuity today at a 7% discount rate? $84,282.98 $87,138.04 $90,182.79 $96,191.91 $116,916.21
Cash flow from operations
_____ is calculated by adding back noncash expenses to net income and adjusting for changes in current assets and liabilities. Total cash flow Capital spending Net working capital Cash flow from operations Cash flow to creditors
ebit + depreciation/ intereset
cash coverage ratio
cash/current liabilities
cash ratio
total assets/total equity
equity multiplier
sales/net fixed assets
fixed asset turnover
current assets/ average daily operating costs
interval measure
cost of goods sold/inventory
inventory turnover
$109,225.29
months. If you can earn 8% on your money, what is this prize worth to you today? $87,003.69 $87,380.23 $87,962.77 $98,104.26 $109,225,29
net working capital/ total assets
net working capital to total assets
Sales/NWC
new working capital turnover
net income/sales
profit margin
current assets -inventory/ current liabilities
quick ratio
sales/accounts receivable
receivables turnover
net income/total assets
return on assets
net income/total equity
return on equity
sales/total assets
total asset turnover
total assets-total equity/total assets
total debt ratio
