Finance 300 exam 1
Variation in the rate of return of an investment is a measure of the riskiness of that investment. True False
True
When making financial decisions, managers should always look at marginal, or incremental cash flows. True False
True
Select the following account that does NOT belong on the asset side of a balance sheet: -accounts receivable -marketable securities -cash -common stock
common stock
Financial analysis -uses historical financial statements and is thus useful only to assess past performance. -relies on generally accepted accounting principles to make comparisons between companies valid. -uses historical financial statements to measure a company's performance and in making financial projections of future performance. -is accounting record-keeping using generally accepted accounting principles.
uses historical financial statements to measure a company's performance and in making financial projections of future performance.
You have been saving toward the purchase of a new mountain bike. Five years ago, you placed $600 in a bank account, and you have since earned an annual rate of return of 12 percent. How much do you now have in your account? -$1,057.41 -$1,293.71 -$978.70 -$1,138.70
$1,057.41
Rock Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's operating income is equal to -$770,000. -$1,070,000. -$1,100,000. -$1,500,000.
$1,100,000.
Suppose that you want to create a "college fund" for your newborn child and place $300 in a bank account at the end of each of the next 20 years. If that account earns an annual rate of return of 7%, how much will be in that account at the end of the twentieth year? -$13,420.00 -$12,977.53 -$13,178.20 -$11,828.32 -$12,298.65
$12,298.65
Jah-Malya can afford a car payment of $400 per month for 48 months at an annual rate of 8.25 percent interest. Which of the following is closest to the amount she will be able to borrow for a new car? -$16,306 -$4,741 -$22,656 -$12,997
$16,306
Determining how a firm should raise money to fund its long-term investments is referred to as capital structure decisions. True False
True
Suppose that you want to purchase a car today. You can afford payments of $400 per month and want to pay the loan back over the next five years. Assuming no down payment is required, how much can you borrow if the bank will charge you an annual percentage rate of 12% compounded monthly? -$16,726.68 -$18,220.18 -$24,667.87 -$25,008.90 -$17,982.02
$17,982.02
A corporation has annual sales of $18 million, total assets of $4 million, a debt ratio of 40%, depreciation expense of $200,000, and a tax rate of 40%. The corporation's total stockholders' equity is equal to -$5,600,000. -$2,800,000. -$2,400,000. -$1,800,000.
$2,400,000.
Suppose that you want to purchase some land to build a homestead in the future. You can afford payments of $5,000 each year and want to pay the loan back over the next 20 years. Assuming no down payment is required, how much can you borrow if the bank will charge you an annual interest rate of 12%? -$100,985.45 -$48,231.47 -$37,347.22 -$160,262.21
$37,347.22
California Retailing Inc. has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. The firm's interest expense is $250,000, and the corporate tax rate is 40%. What is California Retailing's net income? -$288,000 -$350,000 -$377,000 -$390,000
$390,000
Assume that an investment is forecasted to produce the following returns: a 10% probability of a $1,400 return; a 50% probability of a $6,600 return; and a 40% probability of a $1,500 return. What is the expected amount of return this investment will produce? -$4,040 -$7,640 -$12140 -$1,540
$4,040
A firm has after-tax cash flow from operations equal to $100,000. Operating working capital increased by $20,000, and the firm purchased $30,000 of fixed assets. The firm's free cash flow was -$50,000. -$90,000. -$110,000. -$150,000.
$50,000.
John Box Inc. has an annual interest expense of $30,000 and pays income tax equal to 40 percent of taxable income (EBT). John Box's times-interest-earned ratio is 4.2. What is John Box's net income? -$96,000 -$57,000 -$126,000 -$57,600
$57,600
Your great-aunt wants to help with your college graduation party. She has just placed $5,000 dollars in a bank account that will earn an annual rate of return of 6%. If you graduate in four years, how much will be in your party account? -$7,120.89 -$6,142.96 -$5,960.47 -$6,312.38
$6,312.38
Corporation B reported earnings per share of $10. Corporation B has 100,000 shares of common stock outstanding and reported an increase in owners' equity of $400,000 for the period. Corporation B paid $50,000 in interest expense during the period. Corporation B paid dividends per share of -$6.00. -$5.50. -$6.50. -$14.003.
$6.00.
You just purchased a premier lot in an exclusive neighborhood for your future home. The lot cost $50,000, an amount you financed with a 96-month loan. If your interest rate is 9.25 percent compounded monthly, which of the following is closest to your monthly payment? -$744.55 -$853.60 -$767.23 -$739.02 -$810.92
$739.02
California Retailing Inc. has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. What is California Retailing's EBIT? -$850,000 -$875,000 -$900,000 -$1,300,000
$900,000
Siskiyou, Inc. has total current assets of $1,200,000; total current liabilities of $500,000; long-term assets of $800,000; and long-term debt of $600,000. How much is the firm's total equity? -$1,200,000 -$800,000 -$900,000 -$2,000,000
$900,000
What is the present value today of $150 that will be received in four years from now if the discount rate is 12%? -$76.03 -$95.33 -$116.90 -$105.60 -$83.39
$95.33
Assume that you have $165,000 invested in a stock whose beta is 1.25, $85,000 invested in a stock whose beta is 2.35, and $235,000 invested in a stock whose beta is 1.11. What is the beta of your portfolio? -1.37 -2.01 -1.85 -1.57
1.37
Denver Systems has total assets of $1,000,000; common equity of $400,000; a gross profit of $800,000; total operating expenses of $620,000; interest expense of $20,000; income taxes of $74,000; and preferred dividends of $30,000. What is Denver Systems' return on equity? -7.5% -20.0% -21.5% -14.0%
14.0%
Anchor Incorporated has a beta of 1.0. If the expected return on the market is 15%, what is the expected return on Anchor Incorporated's stock? -15% -14% -18% -cannot be determined without the risk-free rate, CAPM
15%
Wendy purchased 800 shares of Genetics Stock at $3 per share on 1/1/12. Wendy sold the shares on 12/31/12 for $3.45. Genetics stock has a beta of 1.9, the risk-free rate of return is 4%, and the market risk premium is 9%. Wendy's holding period return is -15.0%. -16.5%. -17.6%. -21.1%.
15.0%.
Suppose that you had deposited $100 in a bank account for each of the last 5 years. What annual interest rate is attached to this account if there is now (at the end of the fifth year) $758.92 in the account? -10% -16% -19% -21% -23%
21%
Rock Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's net profit margin is equal to -25.67%. -35.67%. -36.67%. -50.00%.
25.67%.
Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000; Rogue's operating profit margin is equal to -25.67%. -35.67%. -36.67%. -50.00%.
36.67%.
TransSystems Inc. has a total equity of $560,000; sales of $2,250,000; total assets of $995,000; and current liabilities of $310,000. What is TransSystems Inc.'s debt ratio? -55.4% -43.7% -31.2% -66.7%
43.7%
The acid-test ratio of a firm would be unaffected by which of the following? -Accounts payable are reduced by obtaining a short-term loan. -Common stock is sold and the money is invested in marketable securities. -Inventories are sold for cash. -Inventories are sold on a short-term credit basis.
Accounts payable are reduced by obtaining a short-term loan.
Company A and Company B have the same gross profit margin and the same total asset turnover, but company A has a higher return on equity. This may result from -Company B has more common stock. -Company A has a lower debt ratio. -Company A has lower selling and administrative expenses, resulting in a higher net profit margin. -Company A has lower cost of goods sold, resulting in a higher net profit margin.
Company A has lower selling and administrative expenses, resulting in a higher net profit margin.
An analyst is evaluating two companies, A and B. Company A has a debt ratio of 50% and Company B has a debt ratio of 25%. In his report, the analyst is concerned about Company B's debt level, but not about Company A's debt level. Which of the following would best explain this position? -Company B has much higher operating income than Company A. -Company A has a lower times interest earned ratio and thus the analyst is not worried about the amount of debt. -Company B has a higher operating return on assets than Company A, but Company A has a higher return on equity than Company B. -Company B has more total assets than Company A.
Company B has a higher operating return on assets than Company A, but Company A has a higher return on equity than Company B.
Common-size balance sheets are balance sheets of companies with almost identical total assets (within 2% of each other). True False
False
If the stock market is efficient, then investors do not need to read the Wall Street Journal or research companies before they select which stocks to buy because market prices already reflect all publicly available information. True False
False
Ratios of almost all companies are easily comparable because all public companies prepare their financial reports based upon generally accepted accounting principles. True False
False
When the present financial ratios of a firm are compared with similar ratios for another firm in the same industry it is called trend analysis. True False
False
Which one of the following is the "enemy" of compound interest and makes it very difficult to reach your financial goals? -Inflation -Annuity factor -Simple interest -Compound frequency -None of the above
Inflation
The current ratio of a firm would be decreased by which of the following? -Land held for investment is sold for cash. -Equipment is purchased, financed by a long-term debt issue. -Inventories are sold for cash. -Inventories are sold on a long-term credit basis.
Inventories are sold on a long-term credit basis.
Investment A has an expected return of 15% per year, while Investment B has an expected return of 12% per year. A rational investor will choose -Investment A because of the higher expected return. -Investment B because a lower return means lower risk. -Investment A if A and B are of equal risk. -Investment A only if the standard deviation of returns for A is higher than the standard deviation of returns for B.
Investment A if A and B are of equal risk.
Consider that you are paying back a fully amortized loan. Which of the following statements is most correct? -Later loan payments involve larger amounts of principal repayment. -The actual loan payments vary from year to year. -After the last loan payment is made, there is still a large principal repayment remaining. -Early loan payments include smaller amounts of interest payments. -None of the above statements are true.
Later loan payments involve larger amounts of principal repayment.
Which of the following is/are true? -Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks. -Two points on the Characteristic Line are the T-bill and the market portfolio. -The greater the total risk of an asset, the greater the expected return. -All securities have a beta between 0 and 1.2
Most of the unsystematic risk is removed by the time a portfolio contains 30 stocks.
Cash flows between investors and the firm, what we call financing cash flows, occur in one of four ways EXCEPT: -Pay stock dividend. -Pay interest to lenders. -Pay dividends to stockholders. -Increase or decrease interest-bearing debt.
Pay stock dividend.
Which of the following statements is MOST correct concerning diversification and risk? -Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry. -Risk-averse investors often select portfolios that include only companies from the same industry group because the familiarity reduces the risk. -Only wealthy investors can diversify their portfolios because a portfolio must contain at least 50 stocks to gain the benefits of diversification. -Proper diversification generally results in the elimination of risk.
Risk-averse investors often choose companies from different industries for their portfolios because the correlation of returns is less than if all the companies came from the same industry.
An income statement may be represented as follows: -Sales - Liabilities = Profits. -Revenues - Liabilities = Net Income. -Sales - Expenses = Retained Earnings. -Sales - Expenses = Profits.
Sales - Expenses = Profits.
The basic format of an income statement is -Sales - Expenses = Profits. -Income - Expenses = EBIT. -Sales - Liabilities = Profits. -Assets - Liabilities = Profits.
Sales - Expenses = Profits.
Two companies have identical assets and operating activities. Which of the follow statements is true? -Both companies have the same net income. -The company with more debt will have lower operating income due to interest expense. -The company with more debt will have higher operating income due to leverage. -The company with more debt will have lower net income due to interest expense.
The company with more debt will have lower net income due to interest expense.
Jones, Inc. has a current ratio equal to 1.40. Which of the following transactions will increase the company's current ratio? -The company collects $500,000 of its accounts receivable. -The company sells $1 million of inventory on credit. -The company pays back $50,000 of its long-term debt. -The company writes a $30,000 check to pay off some existing accounts payable.
The company writes a $30,000 check to pay off some existing accounts payable.
HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to 30% this year, nearly 10% higher than the industry average. However, HighLev's stock price decreases relative to its industry counterparts. How is this possible? -Markets are inefficient and fail to recognize the benefits of leverage. -The increased debt resulted in interest payments that made HighLev's operating income drop even though return on equity increased. -Shareholders are not interested in return on equity. -The high levels of debt increased the riskiness of HighLev relative to its competitors.
The high levels of debt increased the riskiness of HighLev relative to its competitors.
A stock with a beta of 1 has systematic or market risk equal to the "typical" stock in the marketplace. True False
True
Financial ratios are often reported by industry or line of business because differences in the type of business can make ratio comparisons uninformative or even misleading. True False
True
Financial ratios are used by managers inside the company and by lenders, credit-rating agencies, and investors outside of the company. True False
True
If two companies have the same revenues and operating expenses, their net incomes will still be different if one company finances its assets with more debt and the other company with more equity. True False
True
In a limited partnership at least one general partner must exist; that general partner has unlimited liability. True False
True
Its ability to raise capital by selling stock makes the corporation the best form of organization in terms of raising capital. True False
True
Operating profits or EBIT is used to measure a firm's profits on assets because it does not include the firm's cost of debt financing. True False
True
The benefits of diversification occur as long as the investments in a portfolio are not perfectly positively correlated. True False
True
The goal of the firm's financial managers should be the maximization of the total value of the firm's stock. True False
True
The opportunity cost of any choice you make is the highest-valued alternative that you had to give up when you made the choice. True False
True
What information does a firm's income statement provide to the viewing public? -an itemization of all of a firm's assets and liabilities for a defined period of time -a complete listing of all of a firm's cash receipts and cash expenditures for a defined period of time -a report of revenues and expenses for a defined period of time -a report of investments made and their cost for a specific period of time
a report of revenues and expenses for a defined period of time
Assume that an investor is offered a choice of a risk-free government bond that is expected to return 3.5% or a high-risk corporate stock. According to one of the principles of finance, what would induce the investor to purchase the corporate stock? -a return that is substantially lower than 3.5% -cash dividends -a return that is substantially higher than 3.5% -none of the above
a return that is substantially higher than 3.5%
All of the following statements about balance sheets are true EXCEPT -Assets - Liabilities = Shareholders' Equity. -assets are reported at historical cost. - balance sheets show average asset balances over a one-year period. -a balance sheet reports a company's financial position at a specific point in time.
balance sheets show average asset balances over a one-year period.
Portfolio risk is typically measured by _ while the risk of a single investment is measured by _. -standard deviation; beta -security market line; standard deviation -beta; standard deviation -beta; slope of the characteristic line
beta; standard deviation
Which of the following accounts does NOT belong on the asset side of a balance sheet? -accounts receivable -accumulated depreciation -Cash -accruals
accruals
What information does a firm's balance sheet provide to the viewing public? -a report of investments made and their cost for a specific period of time -a complete listing of all of a firm's cash receipts and cash expenditures for a defined period of time -a report of revenues and expenses for a defined period of time -an itemization of all of a firm's assets, liabilities, and equity as of the balance sheet date
an itemization of all of a firm's assets, liabilities, and equity as of the balance sheet date
Of the following, which differs in meaning from the other three? -systematic risk -market risk -undiversifiable risk -asset-unique risk
asset-unique risk
Common-sized income statements -assist in the comparison of companies of different sizes. -show each income statement account -as a percentage of total assets. -compare companies with the same level of total sales. -compare companies with the same level of net income.
assist in the comparison of companies of different sizes.
Stock W has an expected return of 12% with a standard deviation of 8%. If returns are normally distributed, then approximately two-thirds of the time the return on stock W will be -between 12% and 20%. -between 8% and 12%. -between -4% and 28%. -between 4% and 20%.
between 4% and 20%.
Which of the following forms of organizations have earnings that are taxed twice, once as business income and once as personal income as the earnings are distributed to the owners in the form of dividends? -corporations -general partnerships -limited partnerships -both A and C
corporations
Net working capital is equal to -total assets minus total liabilities. -current assets minus total liabilities. -total operating capital minus net income. -current assets minus current liabilities.
current assets minus current liabilities.
The two principal sources of financing for corporations are -debt and accounts payable. -debt and equity. -common equity and preferred equity. -cash and common equity.
debt and equity
Which of the following does NOT provide an indication of liquidity? -quick ratio -debt ratio -inventory turnover -average collection period
debt ratio
Which of the following represents an attempt to measure the net results of the firm's operations (revenues versus expenses) over a given time period? -balance sheet -statement of cash flows -income statement -sources and uses of funds statement
income statement
A firm's financing costs include -depreciation expense. -interest expense -costs of goods sold. -both A and B.
interest expense
Which of the following accounts belongs on the asset side of a balance sheet? -depreciation expense -accounts payable -inventory -accruals
inventory
Smith Corporation has earned a return on capital invested of 10% for the past two years, but an investment analyst reviewing the company has stated the company is not creating shareholder value. This may be due to the fact that -the risk-free rate of interest is 3%. -the corporation's inventory turnover is high. -investors' required rate of return is 8%. -investors' required rate of return is 12%.
investors' required rate of return is 12%.
A corporate financial manager trying to maximize shareholder value -is not concerned with ethics but rather with writing iron-clad contracts. -can safely ignore ethics as long as no laws are broken. -must behave ethically in order to stay out of jail. -is concerned with ethics because unethical behavior destroys trust, and businesses cannot function without a certain degree of trust.
is concerned with ethics because unethical behavior destroys trust, and businesses cannot function without a certain degree of trust.
A company borrows $10,000 and puts the money into its checking account. This transaction will increase the company's current ratio if prior to the transaction the company's current ratio was -equal to one. -greater than one. -less than one. -greater than or less than one, but not equal to one.
less than one.
In an ideal world, which of the following would be used to evaluate firm performance? -book value of assets -corporate retained earnings from the day of incorporation -accounting assets and profits -market value of assets
market value of assets
The primary goal of a publicly owned corporation is to -maximize dividends per share -maximize shareholder wealth -maximize earnings per share after taxes -minimize shareholder risk
maximize shareholder wealth
Which of the following transactions will increase a corporation's operating return on assets? -sell stock and use the money to pay off some long-term debt -sell 10-year bonds and use the money to pay off current liabilities -negotiate a new contract that lowers raw material costs by 10% -increase sales by 10%
negotiate a new contract that lowers raw material costs by 10%
The increase in owners' equity for a given period is equal to -positive net cash flow minus dividends. -net income minus dividends. -sales minus dividends. -gross profit minus distributions to shareholders.
net income minus dividends.
Which of the following has the most significant influence on return on equity? -common dividends -principal payments -accruals -operating income
operating income
All of the following measure liquidity EXCEPT -current ratio. -inventory turnover. -acid-test ratio. -operating return on assets.
operating return on assets.
Examples of uses of cash include -paying cash dividends to stockholders. -borrowing an additional amount using a secured loan. -selling machinery. -all of the above.
paying cash dividends to stockholders.
Gross profit is equal to -profits plus depreciation. -revenues - expenses. -earnings before taxes minus taxes payable. -sales - cost of goods sold.
sales - cost of goods sold.
Common-sized balance sheets -show data for companies in the same industry. -show data for companies with approximately the same amount of assets. -show each balance sheet account as a percentage of total sales. -show each balance sheet account as a percentage of total assets.
show each balance sheet account as a percentage of total assets.
What financial statement explains the changes that took place in the firm's cash balance over a period? -statement of cash flow -balance sheet -income statement -reconciliation of free cash flow
statement of cash flow
A stock's beta is a measure of its -unsystematic risk. -systematic risk. -company-unique risk. -diversifiable risk.
systematic risk.
Determining the best way to raise money to fund a firm's long-term investments is called -the capital budgeting decision. -the portfolio decision. -the money flow processing decision. -the capital structure decision.
the capital structure decision.
The Colorado Jet Boat Company had a cash balance of $3 million at the beginning of 2010. During 2010, Sales were $8 million and expenses were $7 million. Therefore, -the cash balance at the end of 2010 is $4 million. -the cash balance at the end of 2010 must be greater than $3 million. -the cash balance at the end of 2010 must be less than $11 million. -the cash balance at the end of 2010 cannot be determined from the information given.
the cash balance at the end of 2010 cannot be determined from the information given.
The A corporation has an operating profit margin of 20%, operating expenses of $500,000, and financing costs of $15,000. Therefore, -the corporation's gross profit margin is less than 20%. -the corporation's net profit margin is greater than 20%. -the corporation's gross profit margin is greater than 20%. -the corporation's gross profit margin is equal to 20% because gross profit is not affected by operating expenses or financing costs.
the corporation's gross profit margin is greater than 20%.
The current ratio of a firm would equal its quick ratio whenever -the firm has no inventory. -the firm's inventory is equal to its other current assets. -the firm's inventory is equal to its current liabilities. -the firm's current ratio is equal to one.
the firm has no inventory.
Assume that an investor is offered a choice of a risk-free government bond or a high-risk corporate stock. Further assume that the expected return is the same for both. According to one of the axioms of finance, which investment would be chosen? -the corporate stock -the government bond -neither, the investor would be indifferent -none of the above
the government bond
A financial manager is evaluating a project which is expected to generate profits of $100,000 per year for the next 10 years. The project should be accepted if -the cost of the project is less than $1,000,000. -the cost of the project is less than the present value of $100,000 per year for 10 years. -this project's expected profits are higher than any other projects the corporation has available. -the present value of the project's cash inflows exceeds the present value of the project's cash outflows.
the present value of the project's cash inflows exceeds the present value of the project's cash outflows.
Beta is a statistical measure of -unsystematic risk. -total risk. -the standard deviation. -the relationship between an investment's returns and the market return.
the relationship between an investment's returns and the market return.
To measure value, the concept of time value of money is used -to determine the interest rate paid on corporate debt. -to bring the future benefits and costs of a project, measured by its expected profits, back to the present. -to bring the future benefits and costs of a project, measured by its cash flows, back to the present. -to ensure that expected future profits exceed current profits today.
to bring the future benefits and costs of a project, measured by its cash flows, back to the present.
Capital budgeting is concerned with -whether a company's assets should be financed with debt or equity. -managing a firm's cash budgeting procedures. -what long-term investments a firm should undertake. -planning sales of a corporation's equity capital.
what long-term investments a firm should undertake.