Ch 1-4 Review

Which of the following is NOT an operating expense? A. interest expense B. depreciation and amortization C. selling, general, and administrative expenses D. research and development

A. interest expense

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? A. It would be an addition to cash so it would be reflected in the change in cash. B. It would be an addition to property, plant and equipment so it would be an investing activity. C. It would be an expense on the income statement so it would be reflected in operating cash flows. D. None of the above answers is correct.

B. It would be an addition to property, plant and equipment so it would be an investing activity.

Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same firm. Which of the following statements regarding their respective relationships to the firm is correct? A. Jane is legally involved in the managerial decision making of the firm. B. Jane's liability for the firm's debts consists solely of her investment in the firm. C. Joe has no management authority within the partnership. D. Withdrawal of Jane from the partnership will dissolve the partnership.

B. Jane's liability for the firm's debts consists solely of her investment in the firm.

You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true? A. The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B. B. The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B. C. The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B. D. No comparison can be made—we need to know the cash flows to calculate the present value.

B. The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B.

Walgreens Company (NYSE: WAG) is currently trading at $48.75 on the NYSE. Walgreens Company is also listed on NASDAQ and assume it is currently trading on NASDAQ at $48.50. Does an arbitrage opportunity exist and, if so, how would you exploit it and how much would you make on a block trade of 100 shares?

B. Yes, buy on NASDAQ and sell on NYSE, make $25.

Which of the following balance sheet equations is INCORRECT? A. Assets − Current liabilities = Long − term liabilities + Shareholders' equity B. Assets = Liabilities + Shareholders' equity C. Assets − Liabilities = Shareholders' equity D. Assets − Current liabilities = Long − term liabilities

D. Assets − Current liabilities = Long − term liabilities

A limited liability company is essentially ________. A. just another name for a limited partnership B. just another name for a corporation C. a limited partnership without limited partners D. a limited partnership without a general partner

D. a limited partnership without a general partner

You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the future value of this cash flow?

It will have no effect on the future value.

Why is a stock exchange like NASDAQ considered a secondary market?

Shares sold on it are exchanged between investors without any involvement of the issuing corporation.

A firm's statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period. TRUE OR FALSE?

TRUE

Costs and benefits must be put in common terms if they are to be compared. TRUE OR FALSE?

TRUE

The present value (PV) of a stream of cash flows is just the sum of the present values of each individual cash flow. TRUE OR FALSE?

TRUE

The Valuation Principle shows how to make the costs and benefits of a decision comparable so that we can evaluate them properly. TRUE OR FALSE?

TRUE [The value of a commodity or an asset to the firm or its inventors is determined by its competitive market price. The benefits and costs of a decision should be evaluated using the market prices. When value of the benefits exceeds the value of the costs, the decision will increase the market value of the firm.]