FIN 3400 Exam 1 (Ch.1-4)

Ross purchased a new commercial vehicle today for $25,000. The entire amount was financed using a five-year loan with a 4 percent interest rate (compounded monthly). How much will Ross owe on his vehicle loan after making payments for three years (i.e., when two years of payments remain)?

$10,602.44 Correct. Using your financial calculator, enter N = 60, I/Y = 4/12, PV = 25,000, and FV = 0; then solve for PMT. PMT = -$460.41 Then to calculate the amount that Robert will owe on his vehicle loan after making payments for three years, enter N = 24, I/Y = 4/12, PMT = -$460.41, and FV = 0; then solve for PV. PV = $10,602.44. See 4-6: Amortized Loans

Mira has saved $25,000 over the years and she has the option of investing it in either of the two investment plans. Investment A offers 12 percent interest compounded monthly, whereas Investment B pays 13 percent interest compounded semiannually. What would be the difference between the future values of the two investments if Mira's investment horizon is seven years?

$2,703.78 Correct. Using a financial calculator, for Investment A, enter N = 84, PV = -25,000, I/Y = 1, and PMT = 0; then solve for FV. FV= 57,668.07. For Investment B, enter N = 14, PV = -25,000, I/Y = 6.5, and PMT = 0; then solve for FV. FV= 60,731.85. The difference between the future values = $60,371.85 - $57,668.07 = $2,703.78. See 4-5: Annual Percentage Rate (APR) and Effective Annual Rate (EAR)

Lisa's opportunity cost rate is 10 percent compounded annually. How much must she deposit in an account today if she wants to receive $3,200 at the end of each of the next 12 years? Use the equation method to determine the amount to be deposited today.

$21,804 Correct. Present value = PMT × {1 - [1 / (1 + r)n]} / (r) = $3,200 × {1 - [1 / (1 + 0.10)12]} / (0.10) = $21,804. Financial calculator solution: N = 12, I/Y = 10, PMT = 3,200, FV = 0; solve for PV = -21,804 See 4-3: Present Value (PV)

Helium Brands Ltd. has a beginning balance of retained earnings of $185 million. Helium has a net income of $48 million and has paid a dividend of $15 million in the current year. The ending balance of retained earnings is:

$218 million. Correct. The ending balance of retained earnings of Helium Brands is $218 million. It is calculated by adding $185 million to $48 million in net income, and subtracting $15 million in dividends. See 2-2: Financial Statements

Greenwood Builders Ltd. has a debt ratio of 35 percent and it has total assets of $750,000. What is the value of their total liabilities?

$262,500 Correct. Greenwood Builders has a total liability of $262,500, calculated as 35 percent of $750,000. See 2-3: Financial Statement (Ratio) Analysis

Jude wants to receive $1,100 at the beginning of each of the next eight years. If his opportunity cost rate is 9 percent compounded annually, how much must he deposit in an account today? Use a financial calculator to make the calculation.

$6,636 Correct. Financial calculators have a switch, or key, generally marked DUE or BGN, that allows to designate whether annuity cash flows are end-of-period payments (ordinary annuity) or beginning-of- period payments (annuity due). To deal with annuities due, switch the financial calculator to BGN, and proceed as follows. Using the financial calculator, enter N = 8, I/Y = 9, FV = 0, PMT = -1,100; then solve for PV. PV = $6,636. See 4-3: Present Value (PV)

Kim has just graduated from law school. She had taken an education loan of $45,000, which now must be repaid in equal monthly installments over the next six years. What is the amount of the monthly loan repayment, if the loan carries a simple annual interest of 5 percent? The first payment will be made in one month.

$724.72 Correct. Using a financial calculator, enter N = 72, I/Y = 5/12, PV = 45,000, and FV = 0; then solve for PMT. PMT = -$724.72. See 4-6: Amortized Loans

If Alvin invests $5,500 today in a savings account, the money will grow to $8,500 at the end of Year 4. Assuming that the interest is paid once per year, the effective annual rate of the investment is _____.

11.5% Correct. Using a financial calculator, enter N = 4, PV = -5,500, FV = 8,500, and PMT = 0; then solve for I/Y. I/Y = 11.50%. See 4-5: Annual Percentage Rate (APR) and Effective Annual Rate (EAR)

Paul wants to accumulate $14,500 for the down payment for a new condo. He plans to start investing $2,500 annually beginning today. The investment account will pay 10 percent interest compounded annually. How long would it take him to accumulate enough money to make the down payment?

4.4 years Correct. Financial calculators have a switch, or key, generally marked DUE or BGN, that allows to designate whether annuity cash flows are end-of-period payments (ordinary annuity) or beginning-of- period payments (annuity due). Using the financial calculator, switch your financial calculator to BGN; enter I/Y = 10, PMT = -2,500, PV = 0, FV = 14,500; then, solve for N. N = 4.44 years. See 4-4: Solving for Interest Rates (r) or Time (n)

Persian Rugs needs $600 million to support growth next year. If it issues new common stock to raise the funds, the flotation (issuance) costs will be 4 percent. If Persian can issue stock at $125 per share, how many shares of common stock must be issued so that it has $600 million after flotation costs to use for its planned growth?

5,000,000 Correct. Amount of issue = (Net proceeds + Other flotation costs in dollars) / (1 - Flotation costs in decimal form) = ($600,000,000 + $0) / (1 - 0.04) = $625,000,000; Number of shares = (Amount of Issue) / ((Stock price per share) = $625,000,000 / $125 = 5,000,000 See 3-3: The Investment Banking Process

Mike is considering investing $18,500 in an investment that will have a maturity value of $32,500 in eight years. If the interest is compounded monthly, what is the effective annual rate of return earned on the investment?

7.3% Correct. Using your financial calculator, enter N = 96, PV = -18,500, PMT = 0, FV = 32,500; then solve for I/Y; I/Y = 0.58867%. Effective annual rate = (1 + 0.0058867)12 - 1 = 7.30%. See 4-5: Annual Percentage Rate (APR) and Effective Annual Rate (EAR)

LeGo Financials offer two investment plans. Investment A pays 9 percent interest compounded monthly, whereas Investment B pays 10 percent interest compounded semiannually. What are the effective annual rates of Investment A and Investment B?

9.38 percent and 10.25 percent, respectively Correct. Effective annual rate of Investment A = {[1 + (0.09/12)] 12} - 1 = 9.38% Effective annual rate of Investment B = {[1 + (0.10/2)] 2} - 1 = 10.25% See 4-5: Annual Percentage Rate (APR) and Effective Annual Rate (EAR)

Identify the correct statement about a limited liability partnership (LLP).

A general partner of a limited liability partnership is personally liable for all business debts. Correct. In some states, an LLP can be established that permits persons to invest in partnerships without exposure to the personal liability that general partners face. With this type of LLP, at least one partner is designated a general partner and the others are limited partners. The general partners remain fully personally liable for all business debts. See 1-2: Alternative Forms of Business Organization

Which of the following statements is true of a term life insurance?

A term life insurance is a relatively short-term contract that provides financial protection for a temporary period. Correct. Term life insurance is a relatively short-term contract that provides financial protection for a temporary period—perhaps for one year or for five years at a time—and it must be renewed each period to continue such protection. See 3-4: Financial Intermediaries and Their Roles in Financial Markets

Which of the following mathematical expressions is used to compute the book value per share?

Book value per share = Common equity ÷ Total number of shares outstanding Correct. The book value of a stock is calculated by dividing common equity by the total number of shares outstanding. See 2-2: Financial Statements

Which of the following is true of a firm that tries to coordinate and control the worldwide operations of its subsidiaries?

Cash flows in different subsidiaries are denominated in different currencies. Correct. Cash flows in various parts of a multinational corporate system are often denominated in different currencies. The fluctuations in these currencies increase the complexity of the manager's task in a multinational corporation. See 1-5: Forms of Businesses in Other Countries

Which of the following terms refers to the process of converting a not-for-profit stock exchange owned by its members to a for-profit organization with publicly-traded stocks that are owned by outside shareholders?

Demutualization Correct. Organizations that are owned and operated by their members are said to have mutual ownership structures. The process of converting an exchange from a mutual ownership organization to a stock ownership organization is called demutualization. See 3-2: Types of Financial Markets

Which of the following is considered by analysts when comparing the operations of two firms that are financed differently?

Earnings before interest and taxes Correct. When comparing the operations of two firms, analysts often examine the net operating income (NOI), also known as the earnings before interest and taxes (EBIT), because this figure represents the result of normal operations before considering the effects of the firm's financing choices. See 2-2: Financial Statements

Which of the following acts limits the salaries of executives whose companies received Troubled Asset Relief Program (TARP) funds?

Emergency Economic Stabilization Act of 2008 Correct. The Emergency Economic Stabilization Act of 2008 limited the salaries of executives whose companies received Troubled Asset Relief Program (TARP) funds. See 3-5: International Financial Markets

_____ is an example of a long-term investment of a firm.

Equipment Correct. Equipment is an example of a long-term investment by a firm. Long-term assets of a firm will include investments that help generate cash flows over longer periods. See 2-2: Financial Statements

Primary markets are exchanges with physical locations, whereas secondary markets are over-the-counter markets.

False Correct. Primary markets are the markets in which corporations raise new funds. Secondary markets are markets in which existing, previously issued securities are traded among investors. See 3-2: Types of Financial Markets

Retained earnings is the amount of cash that has been generated by the firm through its operations but has not been paid out to stockholders as dividends. Retained earnings are kept in cash or near cash accounts, and thus these cash accounts, when added together, will always be equal to the total retained earnings of the firm.

False Correct. The amount of retained earnings as reported on the balance sheet does not represent cash and is not available for the payment of dividends or anything else. See 2-2: Financial Statements

The mandatory trade-through rule followed for trading in securities does not work to the benefit of shareholders.

False Correct. The trade-through rule states that a stock trade should be executed at the best price that is available in all of the stock markets. This leads to increased competition among the stock markets. See 3-2: Types of Financial Markets

The disadvantages associated with a proprietorship are similar to those of a partnership. A major difference between these two forms of business organization is that a partnership requires a legal agreement that commits the partners' personal assets, which means that partnerships have little difficulty raising large amounts of capital (similar to corporations).

False Correct. Even though partnerships have greater capabilities than proprietorships to raise funds to support growth, partnerships still have difficulty in attracting substantial amounts of funds. See 1-2: Alternative Forms of Business Organization

Financial managers should seek the combination of assets, liabilities, and capital that generate the largest expected projected income in the current accounting period.

False Correct. Managers can increase the value of a firm by making decisions that increase the firm's expected future cash flows, generate the expected cash flows sooner, increase the certainty of the expected cash flows, or produce any combination of these actions. See 1-3: What Goal(s) Should Businesses Pursue?

The proper goal of the financial manager should be to maximize the firm's expected profit, because this will add the most wealth to each of the individual shareholders (owners) of the firm.

False Correct. Managers can increase the value of a firm by making decisions that increase the firm's expected future cash flows, generate the expected cash flows sooner, increase the certainty of the expected cash flows, or produce any combination of these actions. See 1-3: What Goal(s) Should Businesses Pursue?

The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time, whereas the income statement measures the financial position of the firm at a specific point in time.

False Correct. The balance sheet represents a picture taken at a specific point in time (date) that shows a firm's assets and how those assets are financed. The income statement shows the revenues the firm generates and the costs it incurs to generate those revenues during a particular accounting period. See 2-2: Financial Statements

Identify a true statement about the financial services provided by organizations.

Financial services organizations help individuals and companies determine how to invest money to achieve their financial goals. Correct. Persons working in financial services organizations help individuals and companies determine how to invest money to achieve their financial goals. See 1-1: What is Finance?

Which of the following ratios recognizes that many firms lease rather than buy a long-term asset?

Fixed charge coverage ratio Correct. The fixed charge coverage ratio is similar to the TIE ratio, but it is more inclusive because it recognizes that many firms lease rather than buy long-term assets and they must also make sinking fund (required) payments. See 2-3: Financial Statement (Ratio) Analysis

Identify the correct statement about business ethics.

Good business ethics attract and keep employees of the highest caliber. Correct. Executives believe that there is a positive correlation between ethics and long-run profitability because ethical behavior attracts and keeps employees of the highest caliber. See 1-4: What Roles do Ethics and Governance Play in Business Success?

If an analyst's goal is to determine how effectively a firm is managing its assets, which of the following sets of ratios would he or she examine?

Inventory turnover ratio, days sales outstanding, and fixed asset turnover ratio Correct. Asset management ratios measure how effectively the firm is managing its assets. These ratios include inventory turnover ratio, days sales outstanding ratio, fixed assets turnover ratio, and total assets turnover ratio. See 2-3: Financial Statement (Ratio) Analysis

Which of the following should be the primary goal pursued by the financial manager of a firm?

Maximizing the market value of the firm's stock Correct. The appropriate goal for management decisions; considers the risk and timing associated with expected cash flows to maximize the price of the firm's common stock. See 1-3: What Goal(s) Should Businesses Pursue?

Which of the following mathematical expressions computes the net worth of a firm?

Net worth = Total assets minus total liabilities Correct. The firm's stockholders' equity, or net worth, equals total assets minus total liabilities. See 2-2: Financial Statements

Which of the following ratios is calculated to help determine the liquidity of a firm?

Quick ratio Correct. A quick ratio is an indicator of the extent to which the claims of short-term creditors are covered by assets that can be converted to cash fairly quickly. See 2-3: Financial Statement (Ratio) Analysis

Which form of market efficiency that states that it does no good to scrutinize such publicly available information as a company's financial statements to seek abnormal returns, because market prices will adjust to any good news or bad news contained in such reports as soon as they are made public?

Semistrong-form efficiency Correct. Semistrong-form efficiency states that current market prices reflect all publicly available information, whether it is historical or newly released. In this case, it does no good to scrutinize such published data as a company's financial statements to seek abnormal returns. See 3-1: What Are Financial Markets?

Which of the following is true about the book value and market value of a firm's debt?

The book value of a firm's debt generally is either equal to or very close to the market value of the firm's debt. Correct. The debt of a firm represents a contractual obligation to pay a certain amount at a specific time. Thus, the book values of a firm's debt are generally either equal to or very close to the market values of the firm's liabilities. See 2-2: Financial Statements

Which of the following is a reason for a company to go international?

The company is manufacturing the finished product in their country at a very high production cost. Correct. Companies in countries where production costs are high, tend to shift production to low-cost countries. The ability to shift production from country to country has important implications for labor costs in all countries. See 1-5: Forms of Businesses in Other Countries

Which of the following statements concerning the complexity of the manager's task in a multinational corporation is correct?

The currency values of different countries in which a multinational corporation operates often experience fluctuations. Correct. Cash flows in various parts of a multinational corporate system often are denominated in different currencies. An analysis of exchange rates and the effects of fluctuating currency values must be included in all multinational financial analyses. See 1-5: Forms of Businesses in Other Countries

A firm's current ratio has steadily increased over the past 5 years, from 1.9 to 3.8. What would a financial analyst probably conclude from this information?

The firm's liquidity position has improved. Correct. The current ratio is an indicator of the extent to which the claims of short-term creditors are covered by assets that can be converted to cash fairly quickly. Thus, an increase in current ratio would indicate that the liquidity position of the firm has improved. See 2-3: Financial Statement (Ratio) Analysis

Compared to corporations, what is the primary disadvantage of partnerships as a form of business organization?

The owners of a partnership, that is, the partners, have unlimited liability when it comes to business obligations whereas the owners of a corporation have limited liability. Correct. Under partnership law, each partner is liable for the debts of the business, whereas a corporation offers its owners limited liability. See 1-2: Alternative Forms of Business Organization

If a loan is to be repaid in equal periodic amounts (monthly, quarterly, or annually), it is said to be an amortized loan.

True Correct. An amortized loan is a loan that requires equal payments over its life; the payments include both interest and repayment of the debt. See 4-6: Amortized Loans

The effective annual rate (rEAR) considers the effect of compounding, whereas annual percentage rate (APR) does not consider the effect of compounding.

True Correct. Effective annual rate is the annual rate of interest actually being earned, as opposed to the quoted rate. It considers the compounding of interest. Annual percentage rate is another name for the simple interest rate, and it does not consider the effect of interest compounding. See 4-5: Annual Percentage Rate (APR) and Effective Annual Rate (EAR)

Electronic communications networks (ECNs) provide an alternative trading medium, which has increased competition among the stock exchanges.

True Correct. Investors use electronic communications networks (ECNs) through accounts they have at brokerage firms that offer online trading services and subscribe to ECNs. ECNs provide an alternative trading medium, which has increased competition among the stock exchanges. See 3-2: Types of Financial Markets

An investment carries an interest rate of 8 percent compounded annually. When using the time value of money functions of a financial calculator, the interest rate is entered as 8, whereas it is entered as 0.08 when using a spreadsheet to make the time value of money calculations.

True Correct. The interest rate is entered as a percentage (8 in the example) in the financial calculator, whereas it is entered as a decimal (0.08 in the example) in the spreadsheet. See 4-2: Future Value (FV)

Whole-life polices offer both insurance coverage and a savings feature, whereas term life policies do not.

True Correct. Whole-life polices offer both insurance coverage and a savings feature, whereas term life policies do not. Whole-life insurance is a long-term contract that provides lifetime protection, whereas term life insurance is a relatively short-term contract that provides financial protection for a temporary period. See 3-4: Financial Intermediaries and Their Roles in Financial Markets

Incentive compensation plans are used to attract and retain top managerial talent as well as to align the interests of management with shareholders.

True Correct. All incentive compensation plans should be designed to accomplish two things: (1) Provide inducements to executives to act on those factors under their control in a manner that will contribute to stock price maximization. (2) Attract and retain top-level executives. See 1-3: What Goal(s) Should Businesses Pursue?

Exchange rate risk is the risk that the cash flows from a foreign project will be worth less than those same cash flows denominated in the parent company's home currency.

True Correct. Cash flows in various parts of a multinational corporate system are often denominated in different currencies. An analysis of exchange rates and the effects of fluctuating currency values must be included in all multinational financial analyses. See 1-5: Forms of Businesses in Other Countries

The degree to which the managers of a firm attempt to magnify the returns to owners' capital through the use of financial leverage is captured in debt management ratios.

True Correct. If the firm earns more on investments financed with borrowed funds than it pays in interest, the return on the owners' capital is magnified, or leveraged. This is measured with the help of debt management ratios. See 2-3: Financial Statement (Ratio)

A financial manager's task is to make decisions concerning the acquisition and use of funds for the greatest benefit of the firm.

True Correct. The appropriate goal for management decisions is to consider the risk and timing associated with expected cash flows to maximize the price of a firm's common stock. See 1-3: What Goal(s) Should Businesses Pursue?

In general, the role of a financial manager is to plan for the acquisition and use of funds so as to maximize the value of the firm.

True Correct. The appropriate goal for management decisions is to consider the risk and timing associated with expected cash flows to maximize the price of a firm's common stock. See 1-3: What Goal(s) Should Businesses Pursue?

Most foreign financial institutions are allowed to engage in nonbanking (nonfinancial) business activities, whereas the nonbanking activities of U.S. intermediaries have been severely restricted until recently.

True Correct. Most foreign financial institutions are allowed to engage in nonbanking (nonfinancial) business activities, whereas the nonbanking activities of U.S. intermediaries have been severely restricted until recently. See 3-5: International Financial Markets

Which of the following is true about financial institutions in the United States compared to those in other countries?

U.S. financial institutions have been much more heavily regulated than their foreign counterparts with regard to expansion (branching) and the services that could be offered. Correct. U.S. financial institutions have been much more heavily regulated as compared to their foreign counterparts with regard to expansion (branching) and the services that could be offered. Also, most foreign financial institutions are allowed to engage in nonbanking (nonfinancial) business activities, whereas the nonbanking activities of U.S. intermediaries have been severely restricted until recently. See 3-5: International Financial Markets

Which of the following are the degrees of informational efficiency described in the book?

Weak form, semistrong form, and strong form Correct. Informational efficiency is typically classified into one of the following three categories: weak form, semistrong form, and strong form. When the financial markets have a large number of participants in search of the most profitable investments, informational efficiency generally exists. See 3-1: What Are Financial Markets?

Bill is considering investing $450 at the end of every month in a fixed income instrument. He will receive $27,000 at the end of four years. If interest is compounded monthly, what is the effective annual rate of return earned on the investment?

X 11.1% X INCORRECT. Using a financial calculator, enter the known values (FV, PMT, PV, and N) into the appropriate locations and then solve for the unknown value, I/Y. See 4-5: Annual Percentage Rate (APR) and Effective Annual Rate (EAR)

Daisy Inc.'s book value per share is $10, and its market-to-book ratio is 1.5. If its earnings per share is $2.5, calculate its price/earnings (P/E) ratio.

X 4.0 X INCORRECT. The price earnings ratio of a firm is calculated by dividing market price per share by earnings per share. See 2-3: Financial Statement (Ratio) Analysis

Zoey is planning to invest $5,000 in a fixed income security at the end of each of the next four years. She will receive $23,000 at the end of four years. If interest is compounded annually, what is the annual rate of return earned on the investment?

X 8.7% X INCORRECT. Using a financial calculator, enter the known values (FV, PV, PMT, and N) into the appropriate locations and then solve for the unknown value, I/Y. See 4-4: Solving for Interest Rates (r) or Time (n)

A leading bank offers an investment that pays 8 percent interest, compounded semiannually. What is the investment's effective annual rate (rEAR)?

X 8.96% X INCORRECT. Effective annual rate is the annual rate of interest actually being earned, as opposed to the quoted rate. It considers the compounding of interest. See 4-5: Annual Percentage Rate (APR) and Effective Annual Rate (EAR)

When issuing new securities, which of the following decisions does the firm make by itself?

X Deciding whether to go for best-efforts or underwritten issue X INCORRECT. A corporation that must raise funds makes some preliminary decisions on its own including the dollars to be raised and the type of securities used. See 3-3: The Investment Banking Process

Which of the following is considered a use of cash in a cash flow statement?

X Decrease in accounts receivable X INCORRECT. The statement of cash flows of a firm reports the effects of a firm's operating, investing, and financing activities on cash flows over an accounting period. An increase in a liability or equity account and a decrease in an asset account represents a source of cash. See 2-2: Financial Statements

In most instances, the payment of utility bills is an example of _____.

X ordinary annuity X INCORRECT. The three cash flow patterns normally seen in a business include a single payment occurring at one time, multiple payments of same amount over equal time periods, and multiple payments of different amounts over a period of time. See 4-1: Cash Flow Patterns

Zync Corporation decides that instead of simply offering a block of its debt securities for sale to the investment banker that submits the highest price, it should do business with a single (one) investment banker. In this case, the issuing costs are determined by using _____.

a negotiated deal Correct. The company must decide whether to simply offer a block of its securities for sale to the investment banker that submits the highest bid of all interested investment bankers, or whether to negotiate a deal with a single investment banker. See 3-3: The Investment Banking Process

An annuity with payments that occur at the beginning of each period is known as a _____.

annuity due Correct. Annuity due is an annuity with payments that occur at the beginning of each period. See 4-1: Cash Flow Patterns

Mutual funds _____.

are investment companies that use funds provided by savers to buy various types of financial assets, including stocks and bonds, in the financial markets Correct. Mutual funds are investment companies that use funds provided by savers to buy various types of financial assets, including stocks and bonds. These organizations pool investors' funds, reducing risks through diversification. See 3-4: Financial Intermediaries and Their Roles in Financial Markets

An agreement for the sale of securities in which the investment bank handling the transaction gives no assurance that the entire issue will be sold is called a(n) _____.

best-efforts arrangement Correct. In a best-efforts arrangement, the issue is handled on a contingency basis so that the investment banker receives a commission based on the amount of the issue that is sold. The investment banker essentially promises to exert its best efforts when selling the securities. See 3-3: The Investment Banking Process

The Sarbanes-Oxley Act of 2002 requires the chief executive officer of a publicly-traded corporation to _____.

certify financial reports that are submitted to the Securities and Exchange Commission Correct. The Sarbanes-Oxley Act of 2002 requires the chief executive officer of a publicly-traded corporation to certify financial reports that are submitted to the Securities and Exchange Commission. See 1-4: What Roles do Ethics and Governance Play in Business Success?

The investment function of finance helps in _____.

determining the values, risks, and returns associated with such financial assets as stocks and bonds Correct. The investment function of finance determines the values, risks, and returns associated with such financial assets as stocks and bonds. See 1-1: What is Finance?

The Sarbanes-Oxley Act of 2002 requires a publicly-traded corporation to _____.

have a committee that consists of outside directors to oversee the firm's audits Correct. The Sarbanes-Oxley Act of 2002 requires a publicly-traded corporation to have a committee that consists of outside directors to oversee the firm's audits. See 1-4: What Roles do Ethics and Governance Play in Business Success?

Assuming that other things are constant, the price earnings (P/E) ratio:

is higher for firms with high growth prospects and lower for riskier firms. Correct. If other things hold constant, P/E ratios are higher for firms with high growth prospects and lower for riskier firms. See 2-3: Financial Statement (Ratio) Analysis

It is possible to limit the liability faced by some of the partners in a partnership form of business by establishing a _____.

limited liability partnership (LLP) Correct. Alternative business forms that include some of the advantages, and avoid some of the disadvantages, of the three major forms of business have evolved over time. It is possible to limit the liability faced by some of the partners in a business by establishing a limited liability partnership (LLP). See 1-2: Alternative Forms of Business Organization

Ibiza Corporation invested $20,000 for the last four years in an investment that will pay the firm $120,000 at the end of this year. The $120,000 received at the end of this year is an example of a(n) _____.

lump-sum amount Correct. Lump-sum amount is a single, or one-time, payment (received or made) that occurs either today or at some date in the future. See 4-1: Cash Flow Patterns

The primary goal of a publicly-owned firm interested in serving its stockholders should be to _____.

maximize the stock price per share Correct. Management's primary goal is stockholder wealth maximization, which translates into maximizing the value of the firm as measured by the price of its common stock. See 1-3: What Goal(s) Should Businesses Pursue?

The funds provided by common stockholders that consist of common stock, paid-in capital, and retained earnings are referred to as the firm's:

net worth Correct. The stockholders' equity or the net worth of a firm includes the funds provided by common stockholders—common stock, paid-in capital, and retained earnings. See 2-2: Financial Statements

A firm plans to make investments of $5,000 for the next 10 years, paying the amount at the end of each year. This form of cash flow pattern represents a(n) _____.

ordinary annuity Correct. Ordinary annuity is an annuity with payments that occur at the end of each period. So, $5,000 paid at the end of each year for the next 10 years is an example of ordinary annuity. See 4-1: Cash Flow Patterns

Listing requirements of a security refer to the _____.

quantitative and qualitative characteristics a firm must possess to be listed on a stock exchange Correct. For a stock to be traded on an exchange, it must be listed on a stock exchange. Each exchange has established listing requirements, which indicate the quantitative and qualitative characteristics that a firm must possess to be listed. See 3-2: Types of Financial Markets

A stock with a dual listing is _____.

registered to be traded in more than one stock market Correct. A stock with a dual listing is eligible (registered) to be traded in more than one stock market. Dual listing increases marketability because a stock has more exposure through a greater number of outlets than if it were listed on only one market. See 3-2: Types of Financial Markets

David borrowed $120,000 for his business to be repaid in six equal annual installment. The lender charges 6.5 percent interest on the amount of the loan balance that is outstanding at the beginning of each year. The interest component in the amount of the annual installment will be the smallest at the end of:

sixth year. Correct. The interest component of an amortized loan is the largest in the first year when the greatest amount is owed (outstanding) on the loan, and it declines as the outstanding balance of the loan decreases. The interest component in the amount of the annual installment will be the smallest at the end of sixth year. See 4-6: Amortized Loans

A low inventory turnover ratio might indicate that:

the firm is holding excess stocks of inventory. Correct. A low inventory turnover suggests that the firm is holding excess stocks of inventory, some of which might be damaged or obsolete goods that are not actually worth their stated values. See 2-3: Financial Statement (Ratio) Analysis

The difference between the issuing price of a debt or equity issue and the net proceeds of the issue received by the issuing firm is known as the _____.

underwriter's spread Correct. The difference between the issuing price and the net proceeds received by the issuing firm is called the underwriter's spread. It covers the investment banker's costs and provides for a profit. See 3-3: The Investment Banking Process

An arrangement in which the investment banking firm typically buys the securities from the issuing firm and then sells the securities in the primary markets, hoping to make a profit, is called a(n) _____.

underwritten arrangement Correct. In an underwritten arrangement, the investment banker generally assures the company that the entire issue will be sold, so the investment banker bears significant risks in such an offering. With this type of arrangement, the investment banking firm typically buys the securities from the issuing firm and then sells the securities in the primary markets, hoping to make a profit. See 3-3: The Investment Banking Process

Techniques employed by firms to make their financial statements look better than they actually are, are called:

window-dressing techniques. Correct. Window-dressing techniques are techniques employed by firms to make their financial statements look better than they actually are. See 2-4: Uses and Limitations of Ratio Analysis