FIN 3090 Test 1
You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%? 0-0; 1-$1.000; 2-$2.000; 3-$2.000; 4-$2.000
$5,987
How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?
$537.78
Suppose you are buying your first condo for $145,000, and you will make a $15,000 down payment. You have arranged to finance the remainder with a 30-year, monthly payment, amortized mortgage at a 6.5% nominal interest rate, with the first payment due in one month. What will your monthly payments be?
$821.69
The return on invested capital (ROIC) differs from the return on assets (ROA). First, ROIC is based on total invested capital rather than total assets. Second, the numerator of the ROIC is after-tax operating income rather than net income.
T
The statement of cash flows has four main sections, one each for operating, investing, and financing activities, and one that shows a summary of the cash and cash equivalents at the end of the year.
T
The value of any asset is the present value of the cash flows the asset is expected to provide. The cash flows a business is able to provide to its investors is its free cash flow. This is the reason that FCF is so important in finance.
T
Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.
T
Two metrics that are used to measure a company's financial performance are net income and cash flow. Accountants emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on cash flows as they do on net income.
T
Which of the following is an example of a capital market instrument?
Preferred stock.
The NYSE is defined as a "primary" market because it is one of the largest and most important stock markets in the world.
F
Last year Dania Corporation's sales were $525 million. If sales grow at 7.5% per year, how large (in millions) will they be 8 years later?
$ 936.33
You have a chance to buy an annuity that pays $550 at the beginning of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?
$1,565.48
What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?
$10,446
What is the present value of the following cash flow stream at a rate of 12.0%?
$10,747
The amount shown on the December 31, 2014, balance sheet as "retained earnings" is equal to the firm's net income for 2014 minus any dividends it paid.
F
The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.
F
The operating margin measures operating income per dollar of assets.
F
The term IPO stands for "individual purchase order," as when an individual (as opposed to an institution) places an order to buy a stock.
F
When a loan is amortized, a relatively high percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage declines in the loan's later years.
F
EBIT stands for earnings before interest and taxes, and it is often called "operating income."
T
Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock's total market value, is then calculated, and that average return is often used as an indicator of the "return on the market."
T
Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.
T
Hedge funds are somewhat similar to mutual funds. The primary differences are that hedge funds are less highly regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions.
T
If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.
T
If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its stockholders will have to pay personal taxes on the firm's net income.
T
If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase.
T
If a firm's ROE is equal to 9% and its ROA is equal to 6%, its equity multiplier must be 1.5.
T
If the discount (or interest) rate is positive, the future value of an expected series of payments will always exceed the present value of the same series.
T
If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by multiplying the periodic rate by the number of periods per year.
T
If you wanted to know what rate of return stocks have provided in the past, you could examine data on the Dow Jones Industrial Index, the S&P 500 Index, or the NASDAQ Index.
T
In finance, we are generally more interested in cash flows than in accounting profits. Free cash flow (FCF) is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and changes in net operating working capital.
T
In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value."
T
It is generally harder to transfer one's ownership interest in a partnership than in a corporation.
T
Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests.
T
Other things held constant, the more debt a firm uses, the lower its return on total assets will be.
T
Primary markets are large and important, while secondary markets are smaller and less important.
T
Some of the cash flows shown on a time line can be in the form of annuity payments while others can be uneven amounts.
T
The alternative minimum tax (AMT) was created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.
T
The current and quick ratios both help us measure a firm's liquidity. The current ratio measures the relationship of the firm's current assets to its current liabilities, while the quick ratio measures the firm's ability to pay off short-term obligations without relying on the sale of inventories.
T
The income statement shows the difference between a firm's income and its costs--i.e., its profits--during a specified period of time. However, not all reported income comes in the form of cash, and reported costs likewise may not be consistent with cash outlays. Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.
T
The inventory turnover and current ratio are related. The combination of a high current ratio and a low inventory turnover ratio, relative to industry norms, suggests that the firm has an above-average inventory level and/or that part of the inventory is obsolete or damaged.
T
The present value of a future sum decreases as either the discount rate or the number of periods per year increases, other things held constant.
T
The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.
T
The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of the stockholders' claims against the firm's existing assets. Put another way retained earnings are stockholders' reinvested earnings.
T
Bauer Software's current balance sheet shows total common equity of $5,125,000. The company has 530,000 shares of stock outstanding, and they sell at a price of $27.50 per share. By how much do the firm's market and book values per share differ?
$17.83
You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?
$2,326.27
Suppose an Exxon Corporation bond will pay $4,500 ten years from now. If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?
$2,967.92
Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?
$28,532
You inherited an oil well that will pay you $25,000 per year for 25 years, with the first payment being made today. If you think a fair return on the well is 7.5%, how much should you ask for it if you decide to sell it?
$299,574
You are negotiating to make a 7-year loan of $25,000 to Breck Inc. To repay you, Breck will pay $2,500 at the end of Year 1, $5,000 at the end of Year 2, and $7,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, X, at the end of each year from Year 4 through Year 7. Breck is essentially riskless, so you are confident the payments will be made. You regard 8% as an appropriate rate of return on a low risk but illiquid 7-year loan. What cash flow must the investment provide at the end of each of the final 4 years, that is, what is X?
$4,733.15
The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over.
1.36
Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan?
10.38%
Your corporation has a marginal tax rate of 35% and has purchased preferred stock in another company. The before-tax dividend yield on the preferred stock is 12%. What is the company's after-tax return on the preferred, assuming a 70% dividend exclusion?
10.74%
Last year Ann Arbor Corp had $155,000 of assets (which equals total invested capital), $305,000 of sales, $20,000 of net income, and a debt-to-total-capital ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000. The firm finances using only debt and common equity. Assets, total invested capital, sales, and the debt to capital ratio would not be affected. By how much would the cost reduction improve the ROE?
13.42%
Your uncle has $300,000 invested at 7.5%, and he now wants to retire. He wants to withdraw $35,000 at the end of each year, starting at the end of this year. He also wants to have $25,000 left to give you when he ceases to withdraw funds from the account. For how many years can he make the $35,000 withdrawals and still have $25,000 left in the end?
13.48
Ten years ago, Lucas Inc. earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in earnings per share (EPS) over the 10-year period?
15.97%
Last year Jandik Corp. had $295,000 of assets (which is equal to its total invested capital), $18,750 of net income, and a debt-to-total-capital ratio of 37%. Now suppose the new CFO convinces the president to increase the debt-to-total-capital ratio to 48%. Sales, total assets, and total invested capital will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE?
2.13%
Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets (which is equal to its total invested capital) of $395,000. The debt-to-total-capital ratio was 17%, the interest rate on the debt was 7.5%, and the firm's tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt-to-total-capital ratio. Assume that sales, operating costs, total assets, total invested capital, and the tax rate would not be affected, but the interest rate would rise to 8.0%. By how much would the ROE change in response to the change in the capital structure?
2.34%
A good bit of relatively simple algebra is involved in these problems, and although the calculations are simple, it will take students some time to set up the problems and do the arithmetic. We allow for this when assigning problems for a timed test. Also, note that students must know the definitions of a number of ratios to answer the questions. We provide our students with a formula sheet on exams, using the relevant sections of Appendix C at the then of the text. Otherwise, they spend too much time trying to memorize thing rather than trying to understand the issues. The difficulty of the problems depends on (1) whether or not students are provided with a formula sheet and (2) the amount of time they have to work the problems. Out difficulty assessments assume that they have a formula sheet and a "reasonable" amount of time for the test. Note that a few of the problems are trivially easy if students have formula sheets. To work some of the problems, students must transpose equations and solve for items that are normally inputs. For example, the equation for the profit margin is given as Profit margin = Net income/Sales. We might have a problem where sales and the profit margin are given and then require students to find the firm's net income. We explain to our students in class before the exam that they will have to transpose terms in the formulas to work some problems. Problems 84 through 114 are all stand-along problems with individualized data. Problems 115 through 133 are all based on a common set of financial statements, and they require students to calculate ratios and find items like EPS, TIE, and the like using this data set. The financial statements can be changed algorithmically, and this changes the calculated ratios and other items. Ryngard Corp's sales last year were $38,000, and its total assets were $16,000. What was its total assets turnover ratio (TATO)?
2.38
A 5-year corporate bond yields 9%. A 5-year municipal bond of equal risk yields 6.5%. Assume that the state tax rate is zero. At what federal tax rate are you indifferent between the two bonds?
27.78%
You are considering an investment in a Third World bank account that pays a nominal annual rate of 18%, compounded monthly. If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000? Round fractional months up.
38
Last year Rennie Industries had sales of $305,000, assets of $175,000 (which equals total invested capital), a profit margin of 5.3%, and an equity multiplier of 1.2. The CFO believes that the company could reduce its assets by $51,000 without affecting either sales or costs. The firm finances using only debt and common equity. Had it reduced its assets by this amount, and had the debt/total invested capital ratio, sales, and costs remained constant, how much would the ROE have changed?
4.56%
Suppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate would you earn if you bought this bond at the offer price?
5.24%
Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.
7.49%
You plan to invest in securities that pay 8.0%, compounded annually. If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20?
7.84
Which of the following bank accounts has the highest effective annual return?
An account that pays 8% nominal interest with daily (365-day) compounding.
Considered alone, which of the following would increase a company's current ratio?
An increase in accounts receivable.
Companies HD and LD are both profitable, and they have the same total assets (TA), total invested capital, sales (S), return on assets (ROA), and profit margin (PM). Both firms finance using only debt and common equity. However, Company HD has the higher total debt to total capital ratio. Which of the following statements is CORRECT?
Company HD has a higher ROE than Company LD.
Which of the following items cannot be found on a firm's balance sheet under current liabilities?
Cost of goods sold.
One problem with ratio analysis is that relationships can be manipulated. For example, we know that if our current ratio is less than 1.0, then using some of our cash to pay off some of our current liabilities would cause the current ratio to increase and thus make the firm look stronger.
F
Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two years ago with $1 million of identical fixed assets, and neither firm sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of net fixed assets on their balance sheets as those statements are presented to investors.
F
Both interest and dividends paid by a corporation are deductible operating expenses, hence they decrease the firm's taxes.
F
Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value.
F
Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than B's.
F
If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it would be a good buy.
F
In general, it's better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock.
F
Midway through the life of an amortized loan, the percentage of the payment that represents interest must be equal to the percentage that represents repayment of principal. This is true regardless of the original life of the loan or the interest rate on the loan.
F
Other things held constant, a decline in sales accompanied by an increase in financial leverage must result in a lower profit margin.
F
A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?
Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash
You observe that a firm's ROE is above the industry average, but both its profit margin and equity multiplier are below the industry average. Which of the following statements is CORRECT?
Its total assets turnover must be above the industry average.
Money markets are markets for
Short-term debt securities such as Treasury bills and commercial paper
A time line is meaningful even if all cash flows do not occur annually.
T
All other things held constant, the present value of a given annual annuity decreases as the number of periods per year increases.
T
An increase in accounts payable represents an increase in net cash provided by operating activities just like borrowing money from a bank. An increase in accounts payable has an effect similar to taking out a new bank loan. However, these two items show up in different sections of the statement of cash flows to reflect the difference between operating and financing activities.
T
Last year, Delip Industries had (1) negative cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation?
The company sold a new issue of common stock
Which of the following would indicate an improvement in a company's financial position, holding other things constant?
The current and quick ratios both increase
The firm has never paid a dividend on its common stock, and it issued $2,400,000 of 10-year, non-callable, long-term debt in 2013. As of the end of 2014, none of the principal on this debt had been repaid. Assume that the company's sales in 2013 and 2014 were the same. Which of the following statements must be CORRECT?
The firm issued new common stock in 2014.
Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?
The periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%
A $150,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?
The proportion of each payment that represents interest versus repayment of principal would be higher if the interest rate were higher.
Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders?
The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions
Which of the following statements is CORRECT? a. If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance. b. If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet. c. Accounts receivable are reported as a current liability on the balance sheet. d. If a company issues new long-term bonds to purchase fixed assets during the current year, this will increase both its reported current assets and current liabilities at the end of the year. e. Dividends paid reduce the net income that is reported on a company's income statement.
a. If a company pays more in dividends than it generates in net income, its retained earnings as reported on the balance sheet will decline from the previous year's balance.
Which of the following statements is CORRECT? a. One drawback of forming a corporation is that it generally subjects the firm to additional regulations. b. One drawback of forming a corporation is that it subjects the firm's investors to increased personal liabilities. c. One drawback of forming a corporation is that it makes it more difficult for the firm to raise capital. d. One advantage of forming a corporation is that it subjects the firm's investors to fewer taxes. e. One disadvantage of forming a corporation is that it is more difficult for the firm's investors to transfer their ownership interests.
a. One drawback of forming a corporation is that it generally subjects the firm to additional regulations.
Which of the following statements is CORRECT? a. Proprietorships and partnerships generally have a tax advantage over corporations. CorrectRationale: b. In any partnership, every partner has the same rights, privileges, and liability exposure as every other partner. c. Proprietorships are subject to more regulations than corporations. d. One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy. e. Corporations of all types are subject to the corporate income tax.
a. Proprietorships and partnerships generally have a tax advantage over corporations.
Which of the following statements is CORRECT? a. The New York Stock Exchange is an auction market, and it has a physical location. b. Home mortgage loans are traded in the money market. c. If an investor sells shares of stock through a broker, then it would be a primary market transaction. d. Capital markets deal only with common stocks and other equity securities. e. While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
a. The New York Stock Exchange is an auction market, and it has a physical location.
Which of the following statements is CORRECT? Select one: a. An increase in the DSO, other things held constant, could be expected to increase the ROE. b. An increase in a firm's total debt to total capital ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin. c. An increase in the DSO, other things held constant, could be expected to increase the total assets turnover ratio. d. If two firms have the same ROA, the firm with the most debt can be expected to have the lower ROE. e. The ratio of long-term debt to total capital is more likely to experience seasonal fluctuations than is either the DSO or the inventory turnover ratio.
b. An increase in a firm's total debt to total capital ratio, with no changes in its sales or operating costs, could be expected to lower its profit margin.
Which of the following statements is CORRECT? a. If you solve for I and get a negative number, then you must have made a mistake. b. If CF0 is positive and all the other CFs are negative, then you can still solve for I. c. To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial calculator. d. If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost. e. If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.
b. If CF0 is positive and all the other CFs are negative, then you can still solve for I.
Which of the following statements is CORRECT? Select one: a. If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be equal. b. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same. c. If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price/earnings ratio. d. If Firm X's P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and/or be expected to grow at a faster rate. e. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.
b. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.
Which of the following statements is CORRECT? a. The income statement gives us a picture of the firm's financial position at a point in time. b. The balance sheet gives us a picture of the firm's financial position at a point in time. c. The statement of cash flows tells us how much cash the firm must pay out in interest during the year. d. The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year. e. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity.
b. The balance sheet gives us a picture of the firm's financial position at a point in time.
Which of the following statements is CORRECT? Select one: a. A time line is not meaningful unless all cash flows occur annually. b. Time lines are useful for visualizing complex problems prior to doing actual calculations. c. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly. d. Time lines cannot be constructed for annuities where the payments occur at the beginning of the periods. e. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts.
b. Time lines are useful for visualizing complex problems prior to doing actual calculations.
Which of the following statements is most correct? a. Individuals pay taxes on only 30% of the income realized from municipal bonds. b. Individuals are allowed to exclude 70% of their interest income from their taxes. c. Corporations are allowed to exclude 70% of their dividend income from corporate taxes. d. Corporations are allowed to exclude 70% of their interest income from corporate taxes. e. Individuals are allowed to exclude 70% of their dividend income from their taxes.
c. Corporations are allowed to exclude 70% of their dividend income from corporate taxes.
Which of the following statements is CORRECT? Select one: a. The return on common equity (ROE) is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (ROA). b. The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being more risky and/or less likely to enjoy higher future growth. c. The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes. d. Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a margin of 8% for Firm B. Firm A's total debt to total capital ratio is 70% versus 20% for Firm B. Based only on these two facts, you cannot reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the cause of Firm A's higher profit margin. e. Other things held constant, the less debt a firm uses, the lower its return on total assets will be.
c. The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company's operating efficiency is that the BEP does not reflect the effects of debt and taxes.
Which of the following statements is CORRECT? a. Time lines are not useful for visualizing complex problems prior to doing actual calculations. b. A time line is not meaningful unless all cash flows occur annually. c. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods. d. Some of the cash flows shown on a time line can be in the form of annuity payments, but none can be uneven amounts. e. Time lines cannot be constructed in situations where some of the cash flows occur annually but others occur quarterly.
c. Time lines can be constructed for annuities where the payments occur at either the beginning or the end of the periods.
Which of the following statements is CORRECT? a. An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift. b. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction. c. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically. d. Capital market instruments include both long-term debt and common stocks. e. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.
d. Capital market instruments include both long-term debt and common stocks.
Which of the following statements is CORRECT? Select one: a. One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free. b. One way to increase EVA is to achieve the same level of operating income but with more total invested capital obtained at a higher cost of capital. c. If a firm reports positive net income, its EVA must also be positive. d. One way to increase EVA is to generate the same level of operating income but with less total invested capital. e. Actions that increase reported net income will always increase cash flow.
d. One way to increase EVA is to generate the same level of operating income but with less total invested capital.
Which of the following statements is CORRECT? Select one: a. In a typical partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business. b. A major disadvantage of a partnership relative to a corporation is the fact that federal income taxes must be paid by the partners rather than by the firm itself. c. In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business, and the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy. d. Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests. e. A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company.
d. Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests.
Which of the following statements is CORRECT? a. The annual report is an internal document prepared by a firm's managers solely for the use of its creditors/lenders. b. Assets other than cash are expected to produce cash over time, and the amounts of cash they eventually produce should be exactly the same as the amounts at which the assets are carried on the books. c. Prior to the Enron scandal in the early 2000s, companies would put verbal information in their annual reports, along with the financial statements. That verbal information was often misleading, so today annual reports can contain only quantitative information: audited financial statements. d. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows. e. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and statement of stockholders' equity.
d. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.
Which of the following statements is CORRECT? Select one: a. Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase fixed assets is an example of "window dressing." b. "Window dressing" is any action that does not improve a firm's fundamental long-run position and thus increases its intrinsic value. c. Using some of the firm's cash to reduce long-term debt is an example of "window dressing." d. Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of "window dressing." Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of "window dressing." e. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing."
e. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of "window dressing."
What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?
$1,618.62
What's the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year?
8.95%
Last year Almazan Software reported $10.50 million of sales, $6.25 million of operating costs other than depreciation, and $1.30 million of depreciation. The company had $5.00 million of bonds that carry a 6.5% interest rate, and its federal-plus-state income tax rate was 35%. This year's data are expected to remain unchanged except for one item, depreciation, which is expected to increase by $0.70 million. By how much will net income change as a result of the change in depreciation? The company uses the same depreciation calculations for tax and stockholder reporting purposes.
−$0.455
