C-708 Mulitple Choice

What type of risk can an investor reduce through the process of diversification? Unsystematic risk Uncertainty All risk can be reduced Systematic risk only

Unsystematic risk

A firm has projected current assets to be $205 million, fixed assets to be $605 million, current liabilities to be $188 million, long-term debt to be $461 million, and owner's equity to be $106 million. Given this information, what is the discretionary financing need? $38 million $94 million $55 million $9 million

$55 million

A company has assets of $2,000,000, net sales of $3,000,000, and $1,500,000 in equity. Its net income is $10,000,000. What is its return on equity? 3.333 6.667 5 0.15

5

A US Treasury security matures in 26 weeks. What type of treasury is it? A bank deposit A note A bond A bill

A bill

A bond pays a coupon rate equal to the LIBOR rate plus 0.30%. The coupon rate is recalculated every three months. What type of bond is this? A stepped-coupon bond An inflation-linked bond A zero-coupon bond A floating rate note

A floating rate note

A US Treasury security matures in 7 years. What type of security is it? A note A bill A money market instrument A bond

A note

A company has $450,000 in cash, $300,000 in marketable securities, and $500,000 worth of inventory. Its current assets are worth $1,750,000 and its current liabilities are $1,250,000. What is the company's acid test ratio? 1 1.04 0.8 1.16

Acid test ratio = (CA - Inv)/CL = ($1,750,000-$500,000)/$1,250,000 = 1 1

Which answer is not a cost to the investor that is included in the calculation of an investment's interest rate? Opportunity Cost Inflation Risk of a bad investment Brokerage commissions and fees

Brokerage commissions and fees

A company needs funds to expand its business by purchasing new equipment. Which financial market should the company use to raise money? Capital market Money market Derivative market

Capital market

An investment portfolio has a 30% chance of earning $125,000 in a year, a 40% chance of earning $50,000, a 15% chance of earning nothing and 15% chance of losing $20,000. What is its expected return? $50,000 $38,750 $62,000 $54,500

Expected return = (30% × $125,000) + (40% × $50,000) + (15% × 0) + (15% × -$20,000) = $54,500 $54,500

A portfolio is composed of 30% stock, 20% bonds, and 50% mutual funds. The stock is expected to have a 10% return, the bonds a 5% return and the mutual funds a 7% return. What is the expected return of the portfolio? 7.3% 7.5% 7% 8.1%

Expected return = (30% × 10%) + (20% × 5%) + (50% × 7%) = 7.5% 7.5%

You plan to invest $100,000 in a 3 year Certificate of Deposit that has a simple interest rate of 5%. What is its future value? $115,763 $105,000 $115,000 $115,927

FV = $100,000 + (3 × 5% × $100,000) = $115,000 $115,000

What is the future value in 30 years of $100,000 invested today in a savings account earning a 1% simple interest rate every year (rounded up to the nearest dollar)? $134,785 More than $134,785 $30,000 $130,000

FV = $100,000 + (30 × 1% × $100,000) = $130,000 $130,000

What is the future value in 30 years of $100,000 invested today in a savings account earning a 1% compound interest rate every year (rounded up to the nearest dollar)? $30,000 More than $134785 $134,785 $130,000

FV = $100,000 × 1.0130 = $134,785 Using Calculator: N = 30, I/Y = 1, PV = 100,000. [CPT] FV = $134,785 $134,785

You plan to invest $100,000 in a 3 year Certificate of Deposit that has a 5% compound interest rate. What is its future value? $115,763 $115,927 $115,000 $105,000

FV = $100,000 × 1.053 = $115,763 Using Calculator: N = 3, I/Y = 5, PV = 100,000. [CPT] FV = $115,763 $115,763

You have $300,000 that you want to invest in a one year Certificate of Deposit (CD) with a 4% annual interest rate. What will be the value of that CD in a year? $315,000 $301,200 $420,000 $312,000

FV = $300,000 × 1.04 = $312,000 Using Calculator: N = 1, I/Y = 4, PV = 300,000. [CPT] FV = $312,000 $312,000

During a fiscal year, a company had $25,000,000 in total sales. It had a cost of goods sold (COGS) of $18,000,000, and $4,000,000 in additional expenses. What is the company's gross profit margin? 12% 16% 33.33% 28%

Gross Profit Margin = Gross Profit / Sales. Gross Profit = Sales - COGS = $25,000,000 - $18,000,000 = $7,000,000. Hence, GP Margin = $7,000,000/$25,000,000 = 0.28 or 28% 28%

Which of the following is not a statistical forecasting method? Cross-sectional Judgmental Time Series Longitudinal data

Judgmental

In the percent-of-sales forecasting method, which balance sheet items are not assumed to increase proportionately with sales? Long-term debt Inventories Accounts Receivable Accounts Payable

Long-term debt

Using the DuPont System Determine the ROA for the year. Sales = 30,000 Total Assets = 9,900 Net Income = 1,000

Net Profit Margin = 1,000/30,000 = 3.33% Total Asset Turnover = 30,000/9,900 = 3.03 ROA = 3.33 x 3.03 = 10.089 10.09% is the ROA

Using the DuPont System Determine the ROA for the year. Sales = 28,000 Total Assets = 9,000 Net Income = 750

Net Profit Margin = 750/28,000 = 2.68% Total Asset Turnover = 28,000/9,000 = 3.11 ROA = 2.68 x 3.11 = 8.33 8.33% is the ROA

During a fiscal year, a company has $20,000,000 in revenue. Its operating expenses are $17,000,000. What is the company's operating margin? 0.13 0.73 0.15 0.85

Operating margin = EBIT/Revenue. We calculate EBIT = Revenue - Operating expenses = $20,000,000 - $17,000,000 = $3,000,000. Hence, Operating Margin = $3,000,000/$20,000,000 = 0.15 0.15

You expect to receive a payment of $1 million in a year. The annual interest rate is 5%. What is the present value of the future payment? $995,025 $666,667 $952,381 $105,000

PV = $1 million/(1.05) = $952,381 Using Calculator: N = 1, I/Y = 5, FV = $1 million. [CPT] PV = $952,381 $952,381

What is the present value of $100,000 that will be received 5 years from today if you face a 10% compound interest rate every year (rounded up to the nearest dollar)? $52,092 $62,092 $82,092 $72,092

PV = $100,000/(1.105) = $62,092 Using Calculator: N = 5, I/Y = 10, FV = 100,000. [CPT] PV = $62,092 $62,092

Of the following car financing options, which one would you prefer while assuming that you prefer paying the least amount of dollars and that you face a 10% annual compound interest rate on all your financial decisions? a. A lump-sum payment of $20,000 today only. b. A lump-sum payment of $19,000 today only. c. A payment $10,000 today and another of $10,000 in one year from today. d. A lump-sum payment of $20,000 in two years from today.

PV = $20,000/(1.102) = $16,529 gives the smallest payment in today's value. Using Calculator: N = 2, I/Y = 10, FV = 20,000. [CPT] PV = $16,529 d. A lump-sum payment of $20,000 in two years from today.

You own a perpetuity that pays $1000 in the first year. It has a 5% annual interest rate and a 2% annual growth rate. What is the present value of the perpetuity? $33,333 $50,000 $14,286 $20,000

PVGP = A1/(i - g) = $1000/(0.05 - 0.02) = $33,333 $33,333

What is a disadvantage of a partnership? a. Filing taxes is overly complicated. b. Making business decisions involves a board. c. Owners must publish financial statements. d. Personal assets of owners are not protected.

Personal assets of owners are not protected.

What are the three central components of business ethics? a. Personal, managerial, and organizational b. Moral, mission, and strategy c. Practical, tangible, and intangible d. Personal, professional, and corporate

Personal, professional, and corporate

A company issues a bond with the provision that it may pay off the debt early. Which type of risk is this bond subject to? Asset-backed risk Prepayment risk. Model risk. Foreign investment risk

Prepayment risk.

A company has $750,000 in cash, $200,000 in marketable securities and $300,000 worth of accounts receivable. Its current assets are worth $1,500,000 and its current liabilities are $1,000,000. What is the company's quick ratio? 1.3 1.25 1.05 1.5

Quick ratio = (CA - Inv)/CL. Since we are given all the current assets except for the Inventory, then (CA - Inv) = $750,000 + $200,000 + $300,000 = $1,250,000 and Quick Ratio = $1,250,000/$1,000,000 = 1.25 1.25

A company had $5,000,000 in total revenues for its fiscal year. Its expenses for the year were $3,500,000. Its total assets were $12,500,000. What is the company's return on assets for the fiscal year? 0.12 0.4 0.7 0.28

ROA = NI/TA. NI = $5,000,000 - $3,500,000 = $1,500,000. Hence, ROA = $1,500,000/$12,500,000 = 0.12 0.12

Last year T&J Inc. reported total assets of $250 million, equity of $120 million, net income of $50 million, dividends of $15 million, and retained earnings of $35 million. What is T&J Inc.'s sustainable growth rate? 12.50% 41.67% 29.17% 20.00%

SGR = ROE (1-b) = (50/120) x [1- (15/50)] = 29.17% 29.17%

Suppose a firm has a net profit margin of 15%, sales of $155 million, assets of $312 million, and owner's equity of $223 million. If the dividend payout ratio is 10%, what is the firm's sustainable growth rate? 10.43% 13.5% 7.45% 9.38%

SGR = ROE (1-b) = [0.15 x (155/312) x (312/223)] x (1-0.1) = 9.38% 9.38%

Which answer is not a factor that influences market interest rates? Alternative investments Deferred consumption Stock market activity Inflationary expectations

Stock market activity

Which regulation's primary purpose is to ensure that buyers of securities receive complete and accurate information before they invest? Rule 144 Regulation S The Securities Exchange Act of 1934 The Securities Act of 1933

The Securities Act of 1933

An annuity has an interest rate of 7% and makes a quarterly payment of $2,000. The annuity is to last for 5 years. What is the present value of the annuity? $8,200.40 $32,801.58 $2,118.80 $33,505

The formula is: PV = [1-(1+i)^-n] / i, where n is the number of payments and i is the per period interest rate. Using the TI-BA II Plus calculator: N=5x4=20, I/Y=7/4=1.75, PMT=2000, FV=0 and [CPT] [PV] = 33,505.76 3,505.76

A portfolio has $70,000 of bonds and $30,000 of stock. The bonds are 80% likely to have a 10% return and 20% likely to have a 0% return. The stock is 50% likely to have a 20% return and 50% likely to have a 10% loss. What is the expected return? 5.9% 7.1% 13% 2.9%

The steps to calculate expected return are: Expected return on bonds = (80% × 10%) + (20% × 0) = 8% Expected return on stock = (50% × 20%) + (50% × -10%) = 5% Overall expected return = ( 70/100 × 8%) + (30/100 × 5%) = 7.1% 7.1%

According to the Insider Trading Act of 1988, the SEC is allowed to order a penalty of up to how much of the profit of the guilty parties? Four times the profit Five times the profit Three times the profit Six times the profit

Three times the profit

A bond makes only one payment—the payment of the face value on the maturity date. The bond is sold at a discount. What type of bond is this? Zero-coupon bond Stepped-coupon bond Floating rate note Inflation-linked bond

Zero-coupon bond

Which answer best defines financial statements in general? a. A collection of reports that describes a company's financial activities to a third party b. An analysis of the flow of cash into and out of a business c. A detailed report of a company's income and expenses d. A listing of a company's assets and liabilities

a. A collection of reports that describes a company's financial activities to a third party

Which answer gives the best example of a factor that can be determined through an analysis of a company's financial statements? a. All of these answers b. The company's creditworthiness c. The company's profitability d. The accuracy of the company's tax returns

a. All of these answers

Which of the following is the correct order of how assets should be presented on a balance sheet? a. Cash; accounts receivable; inventory; property, plant, and equipment (PPE). b. Accounts receivable; cash; inventory property, plant, and equipment (PPE). c. Cash; inventory; accounts receivable; property, plant, and equipment (PPE). d. Cash; inventory; property, plant, and equipment (PPE); accounts receivable.

a. Cash; accounts receivable; inventory; property, plant, and equipment (PPE).

Financial Ratios help to identify some of the financial strengths and weaknesses of a company. What are two ways that the ratios provide for making meaningful comparisons of a firm's financial data? a. Examining ratios across time to identify trends and comparing the firm's ratios with those of other firms. b. Determining how long it takes to collect the firm's receivables and how long it takes to pay it accounts payables. c. Identifying year over year changes in balance sheet and income statement items. d. Smoothing out differences when comparing firms that use different accounting practices and restating accounting data in relative terms.

a. Examining ratios across time to identify trends and comparing the firm's ratios with those of other firms.

Which answer best summarizes why there may be a difference between a company's pretax income and taxable income? a. Pretax income is based on revenue recognition; taxable income is based on the company's cash flow. b. GAAP requires that companies use historical costs, while the tax code does not. c. The tax code requires full disclosure, GAAP does not. d. All of these answers are correct.

a. Pretax income is based on revenue recognition; taxable income is based on the company's cash flow.

Which statement accurately describes systematic risk? a. Systematic risk is what provides a stock's "risk premium." b. Systematic risk is uncertainty associated with a company or industry in which you invest. c. An example of a systematic risk is if you own stock in a company that has liquidity problems. d. By diversifying your stock portfolio, you can minimize systematic risk.

a. Systematic risk is what provides a stock's "risk premium."

Which of the following describes the relationship between present value and future value? a. When one increases, the other increases, assuming all variables are constant. b. The higher the interest rate, the higher the present value and the lower the future value. c. The more time that passes, the higher the present value and the lower the future value. d. When present value increases, the future value decreases, assuming all variables are constant.

a. When one increases, the other increases, assuming all variables are constant A higher cash flow today would result in a higher amount in the future and vice versa.

What are the stages of Ratio Analysis? a. gather data, calculate ratios, interpret results, take action b. gather data, take action, calculate ratios, interpret results c. gather data, calculate rations, take action, interpret results

a. gather data, caluclate ratios, interpret results and take action

Which statement regarding bonds and par values is true? a. Corporate bonds usually have par values equal to $10,000. b. A bond selling at par has a coupon rate so the bond is worth its redemption value at maturity. c. Corporate bonds usually have a par value of less than $100,000. d. The par value of a bond changes.

b. A bond selling at par has a coupon rate so the bond is worth its redemption value at maturity.

Which option is an adequate method to reduce an investor's risk through diversification? a. Invest in the common stocks of the two companies that have performed the best in the last 5 years. b. Invest in a broad pool of US and international stocks and bonds. c. Invest in a small pool of stocks from companies in the same industry. d. Invest in a start-up business that has a broad ownership among a large number of investors.

b. Invest in a broad pool of US and international stocks and bonds.

Which of the following is an example of trend analysis? a. The company's current gross profit margin is compared with its gross profit margin from past years. b. The company's gross profit margin is compared with its industry's average profit margins. c. The company compares its current assets to its current liabilities.

b. The company's gross profit margin is compared with its industry's average profit margins.

Which statement accurately describes a shareholder's preemptive rights? a. The right to purchase new shares issued by the company b. The right to retain their proportional ownership in a company should it issue another stock offering c. The right to claim a company's remaining assets after a liquidation d. The right to vote on directors

b. The right to retain their proportional ownership in a company should it issue another stock offering

Which answer gives a definition of finance? a. The process of evaluating financial risk b. The study of fund management and asset allocation over time c. A means for evaluating the time value of money d. Recording of all the financial transactions of the company

b. The study of fund management and asset allocation over time

Which statement correctly explains the difference between price risk and reinvestment risk? a. For corporate planning, a bond's price risk is a bigger concern than its reinvestment risk. b. When market interest rates rise, both price risk and reinvestment risk rise also. c. Price risk is positively correlated to interest rates, reinvestment risk is inversely correlated. d. Price risk is positively correlated to maturity, reinvestment risk is inversely correlated.

c. Price risk is positively correlated to interest rates, reinvestment risk is inversely correlated.

A company issues a bond with a coupon rate of 5%. Since the bond was issued, market interest rates have decreased. What effect will this decrease have on the bond's market price and its current yield? a. The bond will trade above par and its current yield will increase. b. The bond will trade below par and its current yield will decrease. c. The bond will trade above par and its current yield will decrease. d. The bond will trade below par and its current yield will increase.

c. The bond will trade above par and its current yield will decrease.

Which statement regarding financial forecasting is correct? a. Forecasting is straightforward and does not require making many assumptions. b. Only a cash budget is needed to prepare a financial forecast. c. The most difficult aspect of preparing a financial forecast is predicting revenue. d. Strategic planners do not rely on financial forecasts to understand the possible outcomes from different investment options.

c. The most difficult aspect of preparing a financial forecast is predicting revenue.

Which prediction based on a description of the yield curve is not correct? a. A normal yield curve suggests that interest rates will be raised in the future. b. An inverted yield curve suggests that interest rates will be dramatically cut. c. A flat yield curve suggests that interest rates will be cut. d. A normal yield curve suggests that interest rates will remain the same in the future.

d. A normal yield curve suggests that interest rates will remain the same in the future.

Which description accurately describes a primary market? a. A primary market is often referred to as a "stock market". b. Securities start trading in primary market venues including the New York Stock Exchange and Nasdaq. c. A primary market is where investors purchase assets from other investors. d. A primary market refers to the market where securities are created.

d. A primary market refers to the market where securities are created.

Which answer does not describe a step in constructing a multi-step income statement? a. Subtract operating expenses from gross profit to determine income from operations. b. Subtract non-operating expenses from income from operations. c. Subtract income tax expense from income before taxes. d. Add all revenues, then subtract all expenses.

d. Add all revenues, then subtract all expenses.

You are considering investing in the common stock of a major US Corporation. Which answer is an example of systematic risk? a. Risk related to an impending lawsuit against the company b. Risk related to the possibility of foreign expropriation of the company's property c. Risk resulting from general unrest in the company's labor force d. Risk resulting from a general decline in the US stock markets

d. Risk resulting from a general decline in the US stock markets

A company has $100,000 in cash, $300,000 in accounts receivable, $50,000 in inventory and a $300,000 office building. Its current liabilities are $250,000. What is the company's current ratio, and does that ratio show good short-term financial strength? a. The current ratio is 3, and the ratio indicates good short-term financial strength. b. The current ratio is 3, and the ratio indicates poor short-term financial strength. c. The current ratio is 1.8, and the ratio indicates poor short-term financial strength. d. The current ratio is 1.8, and the ratio indicates good short-term financial strength.

d. The current ratio is 1.8, and the ratio indicates good short-term financial strength. Current ratio = CA/CL. CA = $100,000 + $300,000 + $50,000 = $450,000. (Note: office building is a Fixed Asset). Current ratio = $450,000/$250,000 = 1.8. The firm has $1.80 in current assets for every $1 it owes in current liability so this reflects good short-term financial strength.

Which concept describes the underlying driver behind all finance? a. Profit b. Fund management and asset allocation c. Risk d. Time

d. time

A company had $1 million in sales last year, $1.5 million in sales this year, and projected net income of $250,000. Last year, it had $5 million of its assets tied to sales, $3 million in sales-affected liabilities, and a retention ratio of 0.3. What is its AFN? $9,992,500 $92,500 $925,000 $23,425,000

formula to calculate AFN is: Projected increase in assets - spontaneous increase in liabilities - any increase in retained earnings. $925,000