FINA 3770 EXAM 1
Which of the following is a financial institution involved in indirect financing financial system? A. Investment banks B. Capital markets C. Commercial banks D. Future and options markets
Commercial banks
Which form(s) of business organization generate(s) the majority of business revenues and profits in the United States? A. Sole proprietorship B. Partnership C. Corporation D. Both Sole proprietorship and Parntership
Corporation
The process of converting financial securities with one set of characteristics into securities with another set of characteristics is called: A. financial bundling B. financial disintermediation C. financial intermediation D. none of the above
Financial intermediation
Which of the following investments will have the highest future value? A. $1,300 invested at an quarterly interest rate of 2.25% for 5 years B. $1,000 invested at an quarterly interest rate of 2.25% for 10 years C. $1,000 invested at an annual interest rate of 10% for 10 years D. $1,300 invested at an annual interest rate of 10% for 5 years
$1,000 invested at an annual interest rate of 10% for 10 years
Juan and Rachel Burpo plan to buy a time-share in six years for $16,860. In order to have adequate funds to do so, Burpos want to make a deposit to their money market fund today. Assume that they will be able to earn an investment rate of 5.75%, compounded annually. How much will Juan and Rachel need to deposit today to achieve their goal? (Round off to the nearest dollar.) A. $8,885 B. $14,243 C. $12,055 D. $11,138
$12,055
Quipe Industries provided the following information for the year ending June 30, 2014. Increase in inventories $42 Purchased treasury stock 25 Purchased property and equipment 27 Net income 495 Decrease in accrued income taxes 63 Depreciation and amortization 168 Decrease in accounts payable 15 Increase in accounts receivable 39 Increase in long-term debt 150 What was Quipe Industries' cash flow from financing for the year ending June 30, 2014? A. $63 B. -$27 C. $125 D. -$202
$125
Joseph Harris is considering an investment that pays 6.5 percent annually. How much must he invest today such that he will have $25,000 in seven years? (Round to the nearest dollar.) A. $16,088 B. $17,474 C. $18,850 D. $16,625
$16,088
Steve Fisher is saving for a new car. He needs to have $ 21,000 for the car in three years. How much will he have to invest today in an account paying 8 percent annually to achieve his target? (Round to nearest dollar.) A. $22,680 B. $16,670 C. $26,454 D. $19,444
$16,670
What is the future value of $1,500 after 5 years if the annual return is 6%, compounded semiannually? A. $2,117 B. $1,915 C. $2,016 D. $1,819
$2,016
Chandler Sporting Goods produces baseball and football equipment and lines of clothing. This year the company had cash and marketable securities worth $335,485, accounts payables worth $1,159,357, inventory of $1,651,599, accounts receivables of $1,488,121, short-term notes payable worth $313,663, and other current assets of $121,427. What is the company's net working capital? A. $2,123,612 B. $1,673,421 C. $1,801,784 D. $3,596,632
$2,123,612
You are interested in investing $15,000, a gift from your grandparents, for the next four years in a mutual fund that will earn an annual return of 8 percent. What will your investment be worth at the end of four years? (Round to the nearest dollar.) A. $20,221 B. $20,407 C. $18,816 D. $18,089
$20,407
The future value of $200,000 invested at a 7% annual rate, compounded quarterly for 3 years is _____. (Do not round your intermediate calculations. Round the final answer to the nearest two decimal places.) A. $109,287.87 B. $111,365.78 C. $246,287.86 D. $222,252.19
$246,287.86
If Norman invested $100,000 for 3 years at 12%, how much interest on interest will he earn? (Do not round intermediate calculations. Round the final answer to two decimal places.) A. $4,585.32 B. $4,303.36 C. $4,856.32 D. $4,492.80
$4,492.80
The following financial data of Covise Corp. for the past fiscal year is given. Net income $34,000 Increase in accounts payable 14,000 Increase in accrued income taxes 14,000 Increase in accounts receivable 16,000 Depreciation 22,000 Calculate company's cash flow to investors from operating activities? A. $46,000 B. $44,000 C. $56,000 D. $68,000
$68,000
Celesta Frank wants to go on a cruise in three years. She could earn 8.2 percent compounded monthly in an account if she deposits the money today. She needs to have $10,000 in three years. How much will she have to deposit today? (Round to the nearest dollar.) A. $6,432 B. $8,148 C. $7,826 D. $7,763
$7,763
Contrary Computer Corp. has reported that its net income for 2010 is $2,700,000. The firm has 600,000 shares outstanding and a price-earnings ratio of 15.8 times. What is the firm's share price? A. $49.50 B. $22.68 C. $4.50 D. $71.10
$71.10
Jack Palomo has deposited $2,500 today in an account paying 6 percent interest annually. What would be the simple interest earned on this investment in five years? If the account pays compound interest, what would be the interest on interest in five years? A. $750; $95.56 B. $150; $95.56 C. $95.56; $845.56 D. $150; $845.56
$750; $95.56
Centennial Brewery produced revenues of $1,145,227 in 2008. It has expenses (excluding depreciation) of $812,640, depreciation of $131,335, and interest expense of $81,112. It pays an average tax rate of 34 percent. What is the firm's net income after taxes? Round your final answer to the nearest dollar. A. $120,140 B. $248,475 C. $40,484 D. $79,292
$79,292
Carlos Lopes is looking to invest for the next three years. He is looking to invest $7,500 today in a bank CD that will earn interest at 5.75 percent annually. How much will he have at the end of three years? (Round to the nearest dollar.) A. $8,870 B. $8,000 C. $8,681 D. $8,681
$8,870
Tumbling Haven, a gymnastic equipment manufacturer, provided the following information to its accountants. The company had current assets of $145,332, net fixed assets of $356,190, and other assets of $4,176. The firm has long-term debt of $76,445, common stock of $200,000, and retained earnings of $134,461. What amount of current liabilities does this firm have? A) $94,792 B) $505,678 C) $171,217 D) None of the above
$94,792
Partnership Advantages: - - - Disadvantages: - - -
Advantages: Limited protection of owner's personal assets Owner's limited liability for firms obligations More sources of expertise More sources of equity Disadvantages: Shared control Shared profit harder to dissolve
If inflation is anticipated to be 5 percent during the next year, while the real rate of interest for a one-year loan is 5 percent, then what should be the nominal rate of interest for a one-year risk-free loan? A. 15 percent B. 10 percent C. 5 percent D. 25 percent
10 percent
Patrick Smith has $5,000 to invest in a small business venture. His partner has promised to pay him back $8,200 in five years. What is the return that this investment earns? A. 8.7% B. 9.3% C. 10.4% D. 11.1%
10.4%
If inflation is anticipated to be 6 percent during the next year, while the real rate of interest for a one-year loan is 5 percent, then what should the nominal rate of interest be for a risk-free one-year loan? A. 6% B. 11% C. 5% D. 12%
11%
At what rate must $4,000 be compounded annually for it to increase to $40,000 in 15 years? (Do not round the intermediate calculations. Round the final answer to the nearest two decimals.) A. 35.82% B. 25.82% C. 14.98% D. 16.59%
16.59%
Castelda company issues zero coupon bonds which mature in 30 years. These bonds can be bought for $999.38 and then pay no annual interest payments, only $100,000 at maturity. What is the annual percentage cost of these bonds to the issuing company? (Do not round intermediate calculations. Round your final answer to two decimal places of percentage.) A. 12.65% B. 13.28% C. 16.59% D. 11.36%
16.59%
Boretti has $400,000 in a stock fund. The fund pays a 10% return, compounded annually. If he does not make another deposit into the account, how long will it take for the account to increase to $2 million? (Do not round intermediate calculations. Round the final answer to two decimal places.) A. 23.33 years B. 16.89 years C. 12.63 years D. 33.33 years
16.89 years
Winston Baker will invest $25,000 in a spa that his sister is starting. He will triple his investment in six years. What is the rate of return that Winston is being promised? (Rounded to the nearest percent.) A. 20% B. 12% C. 18% D. 25%
20%
Your mother/father is trying to choose one of the following bank CDs to deposit $10,000. Which will have the highest future value if she plans to invest for three years? A. 3.50% compounded daily B. 3.25% compounded monthly C. 3.40% compounded quarterly D. 3.75% compounded annually
3.75% compounded annually
Your tuition for the coming year is due today. You borrow $8,000 from your uncle/aunt and agree to repay in the three years an amount of $9,250. What is the interest rate on this loan? Round to the nearest percent. A. 5% B. 6% C. 7% D. 8%
5%
Transent Foods announced that its current sales is $1,233,450 this year. The company forecasts a growth rate of 16 percent for the foreseeable future. How long will it take the firm to produce earnings of $3 million? (Round off to the nearest year.) A. 10 years B. 8 years C. 6 years D. 7 years
6 years
If your investment increased 12% this year and inflation for that period was 4%, what was your real rate of return? A. 9.3% B. 12.0% C. 7.7% D. 8.0%
8.0%
Direct financing occurs when: A. a lender-saver borrows directly from a borrower-spenders B. a borrower-spender borrows from the federal government C. a borrower-spender borrows directly from a lender-savers D. a lender-saver borrows from the federal government
A borrower-spenders borrows directly from a lender-savers.
An officer of a firm who is a majorty owner in a competing firm will probably be subject to A. an IRS audit B. arbitrage profit returns to the SEC C. a conflict of interest with his/her stockholders D. an FBI investigation
A conflict of interest with his/her stockholders
Which of the following is the best example of how a market-value balance sheet item differs from the firm's book-value balance sheet item? A. A firm issued long-term bonds five-years ago that currently sell for par value B. A firm sold common stock twenty-years ago for $20.00 share. The firm's common stock is currently selling for $96.50 per share C. A firm has $5 million of accrued liabilities on the books D. A firm issued preferred stock ten-years ago. These shares of preferred stock currently are selling for par value
A firm sold common stock twenty-years ago for $20.00 share. The firm's common stock is currently selling for $96.50 per share
Which of the following types of owners cannot be engaged in managing the business? A. A sole proprietor B. A general partner C. A limited partner D. None of the above
A limited partner
An example of an agency cost is: A. a manager turning down a value-contributing project because of its risks B. a manager expensing a lavish dinner on the company expense report C. a manager using too little debt within the firm's capital structure because of the additional risk associated with debt D. all of the above
A manager expensing a lavish dinner on the company expense report
The financial market where a new security is sold for the first time is: A. a primary market B. a secondary market C. none of these D. an indirect financial market
A primary market
The financial market where a new security is sold for the first time is: A. a secondary market B. none of these C. a primary market D. an indirect financial market
A primary market
If you have loaned capital to a firm, then you could be A. a manager B. a stakeholder C. a parnter D. all of the above
A stakeholder
Who among the following is the "principal" in the agency relationship of a corporation? A. A stockholder holding 10% or more of any class of voting stock B. A company engineer C. The CEO of the firm D. The board of directors
A stockholder holding 10% or more of any class of voting stock
Sole Proprietorship Advantages: - - - Disadvantages: - - -
Advantages: Easiest to create and control Easiest to dissolve Right to all profits Disadvantages: Owner's personal assets at risk due to unlimited liability for firm obligations Equity only form owner or business profit Business income taxes as personal income Difficult to transfer ownership
Corporation Advantages: - - - Disadvantages: - - -
Advantages: Protects personal assets No shareholder liability for business Easiest to change ownership Greatest access to sources of funds Disadvantages: Most difficult and expensive to establish Dilutes individual control over the firm Overall higher taxes on income for shareholders
The legal system and market forces impose substantial costs on individuals and institutions that engage in unethical behavior. Which of the following would NOT be an example of the above? A. Jail time B. Legal fines C. Financial losses D. Agency conflicts
Agency conflicts
Corruption in business A. creates inefficiencies in an economy B. inhibits growth in an economy C. slows the rate of economic growth in a country D. all of the above
All of the above
When analysts and investors determine the value of a firm's stock, they should consider: A. the size of the expected cash flows associated with owning the stock B. the timing of the cash flows C. the riskiness of the cash flows D. all of the above
All of the above
Which of the following is a major participant in the direct financial market? A. Investment banks B. Large corporations C. Wealthy individuals D. All of the above
All of the above
Which of the following is a stakeholder? A. An employee B. A lender C. The IRS D. All of the above
All of the above
Which of the following mechanisms can help align the behavior of managers with the goals of stockholders? A. Well-designed management compensation B. Managerial labor market C. An independent board of directors D. All of the above
All of the above
Accounting standards prescribed by generally accepted accounting principles (GAAP) are important because they: A. make the financial statements of all firms standardized B. allow one to examine a firm's performance with ease over a period of time C. make it possible for management or analysts to compare a firm's performance with that of other competitors D. All of these
All of these
Which of the following situations will result in an increase in the future value of an investment? A. A decrease in the length of the holding period B. A decrease in the frequency with which interest is compounded C. An increase in the rate of interest D. An increase in the duration between compounding periods
An increase in the rate of interest
Which one of the following characteristics does not pertain to corporations? A. Can be sued B. Are the easiest type of business to form C. Can enter into contracts D. Can borrow money E. Can own stock in other companies
Are the easiest type of business to form
In a public corporation, which of the following reports directly to the owners of a firm? A. CEO B. Board of directors C. CFO D. Audit committee
Board of directors
Which of the following is a basic source of funds for a firm? A. Debt B. Equity C. Asset liquidations D. Both Debt and Equity
Both Debt and Equity
Which of the following business organizational forms create(s) a tax liability on income at the personal income tax rate? A. Sole proprietorship B. Partnership C. Corporation D. Both Sole proprietorship and Partnership
Both Sole proprietorship and Partnership
The nominal rate of interest is comprised of: A. both the real rate of interest and compensation for inflation B. the real rate of interest C. compensation for inflation D. a commodity cross-index return
Both the real rate of interest and compensation for inflation
Difference between a broker and dealer
Broker: brings in a seller and a buyer together but does not buy or sell in the transaction -DOES NOT take on risk Dealer: participates in trades as a buyer or seller using his/her own inventory of securities -TAKES ON risk
Cash Flow to Investors
CFI = CFOA − CFNWC − CFLTA
Cash Flow Invested in Long-Term Assets
CFLTA = LTA current period − LTA previous period
Cash Flows Invested in Working Capital
CFNWC = NWC current period − NWC previous period (NWC= Total Current Assets- Total Current Liabilities) Example: NWC 2014 = $662.0 million NWC 2013 = $342.0 million $662.0m − $342.0m = $320.0 million
Which of the following is primarily responsible for managing all financial aspects of a firm? A. Board of directors B. Audit committee C. CEO D. CFO
CFO
Cash Flows to Investors
CFOA = EB T − Current Taxes + Noncash Expenses Example: EBIT = $168.4 million Current Taxes = $44.3 million Non-cash expenses = $83.1 million $168.4m − $44.3m + $83.1m = $207.2 million
Three Fundamental Decisions in Financial Management (define each)
Capital Budgeting: identify which long-term assets to acquire to maximize net benefits for the firm Financing: determine how to pay for short-term and longer-term assets by finding the best combination of short-term debt, long-term debt, and equity Working Capital: decide how to manage short-term resources and obligations by adjusting current assets and current liabilities to promote growth in cash flow
Which of the following factors or activities can be controlled by a firm's managers? A. The level of economic activity B. The level of market interest rates C. Stock market conditions D. Capital budgeting
Capital budgeting
Which of the following statements is CORRECT? A. If your uncle in New York sold 100 shares of apply through his broker to an investor in New York, this would be a primary market transaction B. An example of a primary market transaction would be inheriting 1000 shares of GE from your grandfather/grandmother C. Money market instruments are illiquid and have high default risk D. Capital market instruments include both long-term debt and common stocks
Capital market instruments include both long-term debt and common stocks
Which of the following balance sheet items generally takes the longest time to convert to cash? A. Accounts payable B. Accounts receivable C. Treasury bills D. Inventory
Inventory
Which of the following is a tax-deductible expense for a corporation? A. Interest paid B. Preferred stock dividends paid C. Common stock dividends paid D. Loan principal paid
Interest paid
You loaned $100 to a friend for one year at a nominal rate of interest of 5 percent. Inflation during that year was 8 percent. How much did the purchasing power of your money change (an increase is positive and a decrease is negative)? A. Increase by approximately 3 percent B. Decrease by approximately 13 percent C. Increase by approximately 13 percent D. Decrease by approximately 3 percent
Decrease by approximately 3 percent
When the discount rate: A. increases, the present value of any future cash flow does not change B. increases, the present value of any future cash flow increases C. decreases, the present value of the future cash flow does not change D. decreases, the present value of any future cash flow increases
Decreases, the present value of any future cash flow increases
The town methods by which funds are transferred from savers to borrowers within an economy's financial system include A. direct and indirect transfers B. primary and secondary transfers C. wholesale and retail transfers D. short-term and long-term transfers
Direct and indirect transfers
What is the difference between FIFO (first in,first out) and LIFO (last in, first out) accounting? A. FIFO refers to the practice of firms, when making sales, assuming that the inventory that came in first (at a higher price) is being sold first B. During a period of rising prices, LIFO implies that a firm is selling the higher cost, newer inventory first, leaving the lower cost, older inventory on the balance sheet C. During a period of falling prices, LIFO implies that a firm is selling the higher cost, newer inventory first, leaving the lower cost, older inventory on the balance sheet D. LIFO refers to the practice of firms, when making sales, assuming that the inventory that came in last is being sold first (at a higher price)
During a period of rising prices, LIFO implies that a firm is selling the higher cost, newer inventory first, leaving the lower cost, older inventory on the balance sheet
What is one of the actions that is NOT an objective of the Sarbanes-Oxley Act of 2002? A. Ensuring that an IRS employee is present at the firm's headquarters B. Restoring ethical conduct within the business sector C. Reducing agency costs in corporations D. Improving the integrity of accounting reporting systems within firms
Ensuring that an IRS employee is present at the firm's headquarters
Compounding Semi-Annually Equation
Example: You deposit $100 in an account that pays 5% annually with semi-annual compounding for two years. What is the ending account balance? $100 x (1 + 0.05/2)^2*2 $100 x (1+1.025)^4 $100 x 1.1038 = $110.38
Future Value Equation
FV = PV x (1+i)^n FVn = future value of investment at end of period n PV = original principle (P0), or present value i = the rate of interest per period n = the number of periods; for example, a year, month, or day (1+i)n = the future value factor Example: You deposit $100 in a savings account earning 10% compounded annually for five years. How much is in the account at the end of that time? $100 x (1+0.10)^5 $100 x (1.10)^5 $100 x 1.6105 = $161.05
Single-Period Investment
FV1=P(1+i)^1 Example: $100 x (1+0.10) $100 x 1.10 = $110
Two-Period Investment
FV2=P(1 + i)^2 Example: $100 x (1+0.10)^2 $100 x 1.21 = $121
Compounding Equation
FVn =PV x (1+ i/m)^m*n Example: You invest $5,000 in an account that pays 15% annually with annual compounding for 10 years. What is the ending account balance? $5,000 x (1+0.15)^1*10 $5,000 x (1+0.15)^10 $5,000 x 4.045558 = $20,227.79
Continuous Compounding Equation
FV∞ = PV x e^ixn (e= 2.71828) Example: Your grandmother wants to put $10,000 in a savings account. How much money will she have at the end of five years if the bank pays 5% interest compounded continuously? $10,000 x e^0.05*5 $10,000 x 1.284025 = $12,840.25
If the interest rate per year and the number of years involved remain the same, the total amount of interest earned on an investment will remain the same irrespective of the frequency of compounding A. True B. False
False
Starting to invest early for retirement reduces the benefits of compound interest A. True B. False
False
The value of a dollar invested at a positive interest rate grows over time but at a slower rate further into the future A. True B. False
False
The critical role of the financial system in an economy is to A. gather money from savers and channel it to borrowers B. regulate the operations of the commercial banks C. provide managers with incentives to increase capital spending D. provide the President with information regarding the debt level in the country
Gather money from savers and channel it to borrowers
Which of the following does NOT belong to an income statement? A. Extraordinary items B. Depreciation expense C. Goodwill D. Amortization expense
Goodwill
Net Working Capital
Net Working Capital =Total Current Assets -Total Current Liabilities Example: Total current assets = $1,039.8 million Total current liabilities = $377.8 million $1,039.8 million - $377.8 million = $662.0 million
Which of the following is/are advantages of the corporate form of organization? A. Reduced start-up costs B. Greater access to capital markets C. Unlimited liability D. Single taxation
Greater access to capital markets
Underwriting is the process by which an investment banker A. lends funds to new companies B. provides seed capital to new start-ups C. markets and resells a company's securities to investors D. helps a company sell its new security issue
Helps a company sell its new security issue
The cost principle states that an asset should be recognized on the balance sheet at the: A. historical cost plus the accumulated depreciation on the asset B. market value less the accumulated depreciation on the asset C. historical cost D. market value of the asset
Historical cost
Savings by _____ in small dollar amounts is the origin of much of the money that funds business loans in an economy A. none of the above B. households C. the U.S. government D. small businesses
Households
____ are the principal lender-savers in the economy A. Businesses B. Households C. Investment banks D. State governments
Households
Working capital management decisions help to determine: A. how a firm's day-to-day financial matters should be managed B. how a firm should finance its assets C. which productive assets a firm should purchase D. all of the above
How a firm's day-to-day financial matters should be managed
You loaned $100 to a friend for one year at a nominal rate of interest of 3 percent. Inflation during that year was 2 percent. How much did the purchasing power of your money change (an increase is positive and a decrease is negative)? A. decreased by 5 percent B. decreased by 1 percent C. increased by 1 percent D. increased by 5 percent
Increased by 1 percent
When the discount rate: A. Increases, the present value of a future cash flow increases B. Decreases, the present value of a future cash flow decreases C. Increases, the present value of a future cash flow decreases D. Decreases, the present value of a future cash flow will remain the same
Increases, the present value of a future cash flow decreases.
If your firm obtains most of its financing from commercial banks, then it primarily accesses the capital markets through: A. a legal loophole that allows all commercial banks the ability to underwrite securities B. direct financing C. indirect financing D. none of the above
Indirect financing
The cost of borrowing money is called: A. inflation B. all of these C. interest D. return
Interest
Which of the following statements about the time value of money concept is true? A. It assumes that inflation rate remains constant for the foreseeable future. B. It refers to the fact that higher cash flows in earlier years are less desirable. C. It assumes that people prefer to consume things at some time in the future rather than today. D. It means a dollar received today is worth more than a dollar received tomorrow.
It means a dollar received today is worth more than a dollar received tomorrow.
Which of the following transactions is a secondary market transaction? A. Johnny Appleseed buying 1,000 shares of Dell through NYSE B. IBM issuing 100,000 shares on the NYSE for the first time C. Mary receiving dividends from IBM D. MicroChip Computers selling $1,000,000 worth of bonds directly to AIG Corp.
Johnny Appleseed buying 1,000 shares of Dell through NYSE
Assets
Likely to be converted to cash within a year (or one operating cycle) Marketable securities Accounts receivable Inventoty
Long-Term Liabilities
Long-term debt: Banks loans Mortgages Bonds with maturity longer than one year
The main responsibility of a financial manager is to A. assist the marketing department in making sales projections B. manage the wealth of stockholders C. keep the firm's debt-holders happy D. make decisions that are in the best interests of the firm's owners
Make decisions that are in the best interests of the firm's owners
One reason for the existence of agency problems between managers and stockholders is that: A. management is separate from ownership B. managers know how to manage the firm better than stockholders C. stockholders have unreasonable expectations about managerial performance D. None of the above
Management is separate from ownership
When a firm estimates future taxes, it should consider the: A. average tax rate B. marginal tax rate C. historic tax rate D. combined tax rate
Marginal tax rate
The main objective of a firm's management should be to A. maximize its stock value B. maximize its profits C. minimize its risk exposure D. reduce its debt level
Maximize its stock value
Income Statement Equation
Net Income = Revenue - Expenses Example: Revenues = $1,563.7 million Expenses = $1,445.2 million $1,563.7 million − $1,445.2 million = $118.5 million
Depreciation and amortization expenses are: A. Long-term liabilities that reduce a firm's net worth B. Noncash expenses that cause a firm's after-tax cash flows to exceed its net income C. After-tax expenses that reduce a firm's cash flows D. Part of correct assets on the balance sheet
Noncash expenses that cause a firm's after-tax cash flows to exceed its net income
From the owner's perspective, which of the following should be the primary focus of managers? A. None of the above should be the primary focus B. Profit maximization C. COGS Minimization D. Revenue maximization
None of the above should be the primary focus
A good capital budgeting decision is: A. one in which the perceived benefits of the project are equal to the cost of the asset B. one in which the perceived benefits of the project are less than the cost of the asset C. on in which the perceived benefits of the project are more than the cost of the asset D. all of the above
One in which the benefits of the project are more than the cost of the asset
Which of the following types of owners is protected by limited liability? A. A sole proprietor B. A general partner C. Owner of a corporation D. None of the above
Owner of a corporation
Present Value Equation
PV = FVn/(1+i)^n Example: You intend to buy a new BMW a year from now and estimate the car will cost $40,000. If your local bank pays 5% interest on savings, how much money will you need to deposit now in order to buy the car as planned? $40,000/(1+0.05) = $38,095.24
Money has a time value because: A. people do not require compensation for deferring consumption B. people prefer to sell things later rather than today C. people can earn interest on money that is invested D. people prefer to receive money tomorrow than today because it is worth more
People can earn interest on money that is invested
Trident Corporation had the following cash flows in the current year. Which of the following will be categorized under the financing activities section of the statement of cash flows? A. Rent on a warehouse amounting to $1.1 million B. Lease income received on a piece of land C. Purchase of $125,000 worth of five-year bonds issued by Towson Utilities D. Preferred dividends of $330,000 paid to shareholders
Preferred dividends of $330,000 paid to shareholders
Difference between primary and secondary markets
Primary Market: wholesale market where firms' new securities are issued and sold for the first time Secondary Market: retail market where previously issued securities are resold (traded)
Which of the following organizational forms is subject to the Securities and Exchange Commission (SEC) regulations? A. Private corporation B. Partnership C. Public corporation D. Sole proprietorship
Public corporation
Which organizational form is best suited for a firm to sell its securities to the market? A. Private corporation B. Partnership C. Sole proprietorship D. Public corporation
Public corporation
Long-Term Assets
Real Assets: Land Buildings Equipment Intangible Assets: Goodwill Patents Copyrights
The presence of a financial market increases the marketability of a financial security by: A. insuring the price of the security B. guaranteeing the accuracy of information produced by the issuer of the security C. reducing the transaction costs for selling the security D. none of the above
Reducing the transaction costs for selling the security
According to the realization principle, revenue from a sale of a firm's products are recognized when the: A. cash is collected from the sale of the products B. buyer orders the goods C. sale occurs whether or not cash is actually received D. products are shipper to the buyer
Sale occurs whether or not cash is actually received
Liabilities
Scheduled to be paid within a year (or one operating cycle) Accounts payable Accrued wages Debt with less than a year's maturity Taxes
Anne Morgan wants to borrow $6,000 for a period of four years. She has two choices. Her bank will lend her the amount at 7.25 percent compounded annually. She can also borrow from her firm and will have to repay a total of $8,130.93 at the end of four years. Should Anne choose her bank or the firm, and what is the interest rate if she borrows from her firm? (Round to the nearest percent.) A. She should borrow from the bank as the bank is charging a higher interest rate of 9% B. She should borrow from the bank as the firm is charging a higher interest rate of 8% C. She should borrow from her firm as it is charging a lower interest rate of 6% D. She should borrow from her firm as it is charging a lower interest of 7%
She should borrow from the bank as the firm is charging a higher interest rate of 8%
The Rule of 72
Shortcut to estimate the number of periods it takes for an amount to double -Accurate for interest rates between 5% and 20% TDM = 72/i Example: If you can earn 8% compounded annually, how long will it take for your money to double? 72/i 72/8 = 9 years
From the owner's perspective, which of the following should be the foal of a firm? A. Profit maximization B. Tax minimization C. Revenue maximization D. Stockholders' wealth maximization
Stockholders' wealth maximization
Among the following, who is typically responsible for managing a large corporation's financial function? A. The Chairman of the board B. The CFO C. The Vice-President - Production D. The CEO
The CFO
Financial markets and financial institutions are both part of: A. the SEC B. none of the above C. the U.S. Treasury D. the financial system
The financial system
investment banking firms provide A. insurance B. overdraft facility C. underwriting services D. auditing services
Underwriting services
Tyson Corporation bought raw materials on April 23, 2008 and also on July 2, 2008. Products produced during the months of May were sold in July. The firm uses FIFO to value its inventory. According to the matching principle, the firm's accountant should associate: A. the inventory acquired on July 2 with the products sold B. the inventory acquired on April 23 with the products sold C. neither of these dates is valid because the products were sold in July D. none of these
The inventory acquired on April 23 with the products sold
Executives that repeatedly put their own interests before that of the firm may find that they have difficulty in finding another job after their current one. This is an example of: A. the managerial labor market disciplining managers B. the market for corporate control C. the board of directors affecting the prospects of a manager D. none of the above
The managerial labor market disciplining managers
A highly liquid financial instrument with a maturity of 90 days would be traded in: A. the stock market B. the money market C. none of the above D. the bond market
The money market
Which of the following statements is incorrect? A. Hedge funds are major buyers and sellers of securities in the direct financial markets B. Life insurance companies are major buyers of securities in the direct financial markets C. Direct transactions in wholesale markets have typical minimum transaction size of $1 million D. The retail individual investor is a common direct participant in the direct financial markets
The retail individual investor is a common direct participant in the direct financial markets
Large firms are most likely to use money markets for the following reason: A. to adjust their liquidity position B. to finance long-term investments C. to make long-term investments D. to buy commercial paper at lower interest rates than it could sell through a bank
To adjust their liquidity position
An important function of the financial system is: A. to help state governments to coordinate state tax levies B. to allow the federal government to view all financial transactions C. to direct money to the best investment opportunities in the economy D. to direct the money from borrower-lenders to lender-savers
To direct money to the best investment opportunities in the economy
Balance Sheet Equation
Total Assets = Total Liabilities + Stockholders' Equity
According to the balance sheet identity, total assets must equal: A. total liabilities plus owners' equity B. total shareholders' equity less current assets C. fixed assets plus total debt D. current assets plus current liabilities
Total liabilities plus owners' equity
The time value of money concept recognizes that people require additional compensation for deferring consumption A. True B. False
True
if the discount rate increases, then the present value of a potential investment would fall A. True B. False
True
The statement of cash flows can be described as: A. representing only the company's financing activities B. measuring only the company's operating activities C. having a value equal to the sum of the long-term liabilities and notes plus the depreciation expense D. tying together the income statement with the balance sheets from the beginning of the period and the end
Tying together the income statement with the balance sheets from the beginning of the period and the end
Information asymmetry is a situation in which on party in a business transaction has information that is ____ to the other parties in the transaction A. deceptive B. offensive C. available D. unavailable
Unavailable
Future value measures: A. the value of an investment in today's terms B. the value of an investment after subtracting interest earned on it for one or more periods C. what one or more cash flows are worth at the end of a specified period D. what one or more cash flows that is to be received in the future will be worth today
What one or more cash flows are worth at the end of a specified period
The capital budgeting decision process can be described as A. how a firm's day-to-day financial matters should be managed B. how a firm should finance its assets C. which productive assets a firm should purchase D. all of the above
Which productive assets a firm should purchase
Under which of the following discounting methods will the present value of an investment be the highest, assuming the same annual interest rate? A. Yearly B. Semi-annually C. Quarterly D. Monthly
Yearly
A society's ideas about what actions are right and wrong are termed as: A. rules and policies B. unwritten laws C. ethics D. laws
ethics
Fisher Equation
i=r+∆P e+r∆P e i = nominal rate of interest r = real rate of interest ∆P e = expected annualized price-level change r∆P e = adjustment of the interest rate for expected price-level change Simplified: i=r+∆P e Example: If the real rate is 4% and the expected inflation rate is 10%, what is the approximate expected nominal rate? i=0.04+0.10 i= 0.14 or 14%
