Finance Final Practice Problems Q+A
When a firm estimates future taxes, it should consider the: marginal tax rate. historic tax rate. average tax rate. combined tax rate.
marginal tax rate
Current liabilities are liabilities that will be converted to cash within a year must be paid within a year will be converted to equity within a year none of the above
must be paid within a year
The most useful way to prepare a common size income statement is to express each account item as a percentage of total debt. net sales. total assets. total equity.
net sales.
A good capital budgeting decision is A) one in which the benefits of the project are equal to the cost of the asset. B) one in which the benefits of the project are less than the cost of the asset. C) one in which the 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.
Stocks that are traded in the _____ are typically those of smaller and lesser known firms. New york stock exchange over-the-coutner National stock exchange American stock exchange
over the counter
A common-size balance sheet presents the amounts in asset, liability, and owners' equity accounts as a percentage of total net income. percentage of total assets. percentage of total net cash flow. percentage of total sales.
percentage of total assets.
Investors are likely to be most interested in a firm's total asset turnover ratio times-interest-earned ratio current ratio price-earnings ratio
price-earnings ratio
Which organizational form best enables a firm to sell its securities to the market? Partnership private corp. public corp. Sole proprietorship
public corp.
One reason ratio analysis has limitations is ratios may be too high or too low. ratios are difficult to calculate. ratios do not show dollar amounts. ratios depend on historical data.
ratios depend on historical data.
Cash dividends are paid out of residual cash flows liquidated assets long-term debt all of the above
residual cash flows
The cash remaining with the firm after paying its operating expenses, making payments to creditors and taxes is called assets capital contributed in excess of par. residual cash flows earnings per share
residual cash flows
You just purchased a share of IBM stock on the New York Stock Exchange. What kind of transaction was this? Private placement primary market transaction secondary market transaction futures market transaction
secondary market transaction
Which of the following theories states that security prices reflect all public information, but not all private information? Nominal-form efficiency strong-form efficiency weak-form efficiency semistrong-form efficiency
semistrong-form efficiency
A firm's net income may be greater than its net cash flows if the firm: deferred income taxes. did not pay dividends. sold merchandise on credit. deducted depreciation expense.
sold merchandise on credit.
A stakeholder is someone geographically close to the firms headquarters someone who has a claim on the cash flows of the firm some govt agency all of the above
someone who has a claim on the cash flows of the firm
Broadly speaking, management's perspective of financial statement analysis is similar to that of _____ tax authorities. short-term creditors. stockholders. long-term creditors.
stockholders
The general level of interest rates tend to follow deflation the business cycle all of these the default cycle
the business cycle
A debt ratio of 0.9 means the firm has $0.90 of total debt per $1.00 of assets. the firm has $0.90 of short-term debt per $1.00 of assets. the firm has $0.90 of total debt per $1.00 of equity. the firm has $0.90 of short-term debt per $1.00 of long-term debt.
the firm has $0.90 of total debt per $1.00 of assets.
Which of the following statements is true? The value of a dollar invested at a positive interest rate decreases over time the further in the future you receive a dollar, the less it is worth today a dollar in hand today is worth less that the dollar to be received in the future the higher the rate of interest, the more likely an investor will elect to consume at present and forgo invest his funds
the further in the future you receive a dollar, the less it is worth today
The term money market is used because Firms that issue securities in this market are in dire need of cash none of these it is a market where stocks are converted into money the instruments traded in this market are close substitutes for cash
the instruments traded in this market are close substitutes for cash
A highly liquid financial instrument with a maturity of 90 days would be traded in the money market the stock market none of these the bond market
the money market
To calculate an expected return, each scenario return is weighted by _____. the probability of its occurrence the overall riskiness of the investment the purchase price of the investment the period in which it is received
the probability of its occurrence
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 the nominal rate of interest be for a risk-free one year loan? 5 percent 10 percent 25 percent none of these
10 percent
Which of the following matters most to investors when making an investment? A firms cash flows a firms previous dividend payments a firms current ratio a firms retained earnings
A firms cash flows
Which of the following cannot be engaged in managing the business? A sole proprietor A general partner A limited partner None of the above
A limited partner
Which of the following is an example of current liabilities? Bank term loans Pension obligations Accounts payable Loss on sale of a fixed asset
Accounts payable
Which of the following is a liquidity ratio? Productivity ratios Acid-test ratio Inventory turnover ratio Total debt ratio
Acid-test ratio
Which of the following is a stakeholder? An employee A lender The IRS All of the above
All of the above
Which of the following reports directly to the owners of a firm? (assume the firm is a public corporation) Audit committee CFO CEO Board of directors
CEO
Which of the following is responsible for performing an independent audit of a firm's financial statements? CEO Audit committee CFO CPA firm
CPA firm
Which of the following is a section of the statement of cash flows? Cash flow from operating activities Cash budget Cash flow from noncash activities Current assets
Cash flow from operating activities
Which one of the following is an efficiency ratio? Days sales outstanding Current ratio Price-earnings ratio Debt-to-equity ratio
Days sales outstanding
Which of the following would appear as a liability on a company's balance sheet Depreciation expense Preferred stock cost of goods sold notes payable
Notes payable
Which of the following is true of risk and expected returns? Higher the risk, higher the expected returns on an investment. The expected return on an investment is inversely proportional to the associated risk. The expected return on an investment is independent of the associated risk. If two investments have the same expected return, investors prefer the riskier alternative.
Higher the risk, higher the expected returns on an investment.
Working capital management decisions help to determine How a firms day-to- day financial matters should be managed how a firm should finance its assets which productive assets a firm should purchase all of the above
How a firms day-to- day financial matters should be managed
Which of the following statements is true regarding a common-size income statement? In a common size income statement, each item is divided by cash flow from investing activities. In a common size income statement, each item is divided by net sales. In a common size income statement, each item is divided by total assets. In a common size income statement, each item is divided by current liabilities.
In a common size income statement, each item is divided by net sales.
Which of the following balance sheet items generally takes the longest time to convert to cash? Accounts receivable Accounts payable Inventory Treasury bills
Inventory
Which of the following statements is true of the rule of 72? It is fairly accurate for interest rates between 25 and 50 percent It can be used to estimate the approximate compound interest earned for a period of 72 days It can be used to determine the amount of time it takes to double an investment It states that the time to double your money (TDM) approx. equals 72/i, where i represents the years it takes to double your investment
It can be used to determine the amount of time it takes to double an investment
Which of the following is true of financial statement analysis? It involves the use of financial ratios to analyze a firm's performance. Creditors' perspective of financial statement analysis is similar to that of stockholders. It can be used for evaluating private companies, not public companies. It is used by creditors to find the value of their stock.
It involves the use of financial ratios to analyze a firm's performance.
Which of the following is considered a hybrid organizational form? Corporation Limited Liability Partnership Sole Proprietorship Partnership
Limited Liability partnership
A commercial bank wants to determine if an applicant for a loan is likely to be able to pay its bills as they come due. Which type of ratio is most appropriate? Leverage ratio Profitability ratio Liquidity ratio Efficiency ratio
Liquidity ratio
Which of the following equations describes a firm's net cash flow from operating activities? Net cash flow = Revenues − Expenses Net cash flow = Increase in Fixed Assets − Decrease in fixed assets Net cash flow = Net income − Non-cash revenues + Non-cash expenses Net cash flow = Operating income − Depreciation
Net cash flow = Net income − Non-cash revenues + Non-cash expenses
_____ are defined as total sales less all sales discounts and sales returns and allowances. Credit sales Gross cash sales Gross sales Net sales
Net sales
What is the mathematical expression to calculate net working capital? Net working capital = Total assets - Total liabilities Net working capital = Total current assets - Total current liabilities Net working capital = Stockholders' equity + Total liabilities Net working capital = Total assets + Total liabilities
Net working capital = Total current assets - Total current liabilities
Which of the following owners is protected by limited liability? A sole proprietor a general partner owner of a corporation none of the above
Owner of a corporation
Common stockholders are Owners of a firm Agents of a firm Creditors of a firm Managers of a firm
Owners of a firm
Which of the following assets is an intangible asset? Patents and copyrights Plant and equipment Delivery truck Land and buildings
Patents and copyrights
Which of the following ratios is an indicator of market value? Quick ratio Total asset turnover ratio Return on equity Price-earnings ratio
Price-earnings ratio
Which of the following is an assumption of fundamental accounting principles? Businesses will remain in operation only for a definite period Revenue is recognized only when the sale is virtually completed and the exchange value for the goods or services can be reliably determined Revenue on the income statement should match with the assets acquired to generate the revenue Accounting statements are based on current market prices or values, not on historical costs
Revenue is recognized only when the sale is virtually completed and the exchange value for the goods or services can be reliably determined
Dividing numbers by a common base to form a ratio is called aggregating. scaling. approximating. averaging.
Scaling
Which of the following aspects about a company's health does the current ratio measure? Short-term solvency Profitability Leverage Efficiency
Short-term solvency
Who among the following is the principal in the agency relationship of a corporation The board of directors The CEO of a firm A stockholders A company engineer
Stockholders
The generally accepted accounting principles (GAAP) are set by: The Financial Accounting Standards Board (FASB). Securities Exchange Commission (SEC). The Federal Reserve Board (FRB). The United States Congress.
The Financial Accounting Standards Board (FASB).
Which of the following is an appropriate benchmark in ratio analysis? The average market share for the industry The average collection period for a peer group of firms The average stock price for industry The average dividend payment for a peer group of firms
The average collection period for a peer group of firms
Which of the following statements is true of financial statements? The net income reported in the income statement is transferred to assets on the balance sheet. The ending balance on the statement of retained earnings is transferred to cash flow from operating activities. The ending balance on the balance sheet is transferred to cash flow from investing activities. The ending cash balance from the statement of cash flows is used as the cash balance on the balance sheet.
The ending cash balance from the statement of cash flows is used as the cash balance on the balance sheet.
One reason for the existence of agency problems between managers and stockholders is that There is a significant degree of separation between management and ownership Managers know how to manage the firm better than stockholders Stockholders have unreasonable expectations about managerial performance None of the above
There is a significant degree of separation between management and ownership
Which of the following is a guideline that can help when analyzing a firm's financial statements? Compare a firm's financial statements with those of competitors that are roughly the disparate size. Understand which perspective one is adopting for the analysis i.e. stockholders', managers', or creditors'. Analyzing only the income statement of the company. Always use unaudited financial statements if available.
Understand which perspective one is adopting for the analysis i.e. stockholders', managers', or creditors'.
Which of the following statements regarding variance is true? Variance is the square root of standard deviation. Variance is a measure of total risk. Variance is a measure of the uncertainty surrounding an outcome. Variance can be negative.
Variance is a measure of the uncertainty surrounding an outcome.
Which of the following is a primary concern of a firm's creditors? Whether and when they will receive their entitled interest payment Whether the price-to-earnings ratio has improved Whether the firm has deferred taxes Whether the firm is generating enough cash to pay dividends
Whether and when they will receive their entitled interest payment
The DuPont system is a cash flow analysis tool. a valuation tool. a diagnostic tool. a liquidity analysis tool.
a diagnostic tool.
Treasury stock represents stock that: is being held to purchase treasury securities. a firm has sold to the U.S. Treasury Department. is being held to purchase preferred stock. a firm has purchased back from investors.
a firm has purchased back from investors.
If you are a borrower, which would you prefer to occur during the life of your loan? no inflation at all a level of inflation that is lower than the anticipated outset of the loan a level of inflation that is higher than the anticipated outset of the loan a level of inflation that is exactly as anticipated at the outset of the loan
a level of inflation that is higher than the anticipated outset of the loan
An example of an agency cost is, A manager turning down a value-contributing project because of its risks a manager expensing a lavish dinner on the company expense report a manager using too little debt within the firms capital structure because of the additional risk associated with debt 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 secondary market an indirect financial market none of these a primary market
a primary market
If you have loaned capital to a firm, then you could be a manager a stakeholder a partner all of the above
a stakeholder
The accelerated depreciation method is better than the straight-line depreciation method for tax purposes because it: alters the timing of when the depreciation is expensed. makes earnings look better. allows a firm to take more of a total depreciation write-off. reduces the cost of an asset.
alters the timing of when the depreciation is expensed.
An economy with a large flow of funds requires a frictionless market a lot of gold reserves an efficient financial system all of these
an efficient financial system
A mutual fund is an example of an investment fund an endowment fund a pension fund a line of credit
an investment fund
The NYSE is an example of all of these an over-the-counter market exchange an organized exchange a commodities exchange
an organized exchange
Accounting statements are: based on historical data. based on inflation-adjusted data. based on current cost data. based on residual-value data.
based on historical data.
Interest is a tax-deductible expense. This causes firms to have a preference for financing with: retained earnings. preferred stock. common stock. bonds.
bonds
Which of the following business organizational form(s) subject(s) the owner(s) to unlimited liability? Sole proprietorship general partnership corporation both sole proprietorship and general partnership
both sole proprietorship and general partnership
the nominal rate of interest is made up of: the real rate of interest both the real rate of interest and compensation for inflation compensation for inflation a commodity cross-index return
both the real rate of interest and compensation for inflation
The average tax rate is: the tax rate on the excess over the base. the tax rate that is paid on the last dollar of income earned. calculated by dividing the total taxes paid by the taxable income. always higher than the marginal tax rate.
calculated by dividing the total taxes paid by the taxable income.
The risk per unit of return is measured by the _____. variance standard deviation median coefficient of variation
coefficient of variation
Which of the following would appear as part of equity on the company's balance sheet? Accounts recievable Buildings Common stock inventory
common stock
A common sized income statement is useful for comparing total assets and total liabilities of different firms. comparing working capital position of firms in different industries. comparing financial performance of different firms. comparing cash from investing activities of different firms.
comparing financial performance of different firms.
The total holding period return on an investment ____ consists of a capital appreciation component and an income component. stays constant every year. is the difference between its selling price and its income component. is the difference between the selling price and the purchase price.
consists of a capital appreciation component and an income component.
When the discount rate increases the present values of any future cash flows does not change increases the present value of any future cash flow increases decreases the present value of any future cash flow increases decreases the present value of the future cash flow does not change
decreases the present value of any future cash flow increases
In order to measure the variance of a portfolio consisting of two or more assets we need _____. each asset's variance each asset's correlation coefficient with the market the covariance between the each asset's return and market return each asset's beta
each asset's variance
The greater the risk associated with an investment, the greater is its _____. book value expected return price market appeal
expected return
The process of converting financial securities with one set of characteristics into securities with another set of characteristics is called financial disintermediation financial intermediation none of these financial bundling
financial intermediation
Which of the following is the advantage of the corporate form of organization? Reduced start up costs Greater access to capital markets unlimited liability single taxation
greater access to capital markets
When discount rate increases the present value of a future cash flow decreases decreases the present value of a future cash flow will remain the same increases the present value of a future cash flow increases decreases the present value of a future cash flow decreases
increases the present value of a future cash flow decreases
The cost of borrowing money is called inflation interest return all of these
interest
Which of the following is a tax-deductible expense for a corp interest paid preferred stock dividends loan principal paid common stock dividends paid
interest paid
If the supply of loanable funds decreases relative to the demand for those funds, then we would expect: interest rates to decrease the interest rates to remain unchanged the cost of $ to remain unchanged interest rates to increase
interest rates to increase
If the supply of loanable funds decreases relative to the demand for those funds, then we would expect: interest rates to increase the cost of money to remain unchanged interest rates to decrease interest rates to remain unchanged
interest rates to increase
The quick ratio may be a better indicator of liquidity than the current ratio because _____ may be relatively difficult to convert to cash in a short period of time. inventory plant and equipment marketable securities accounts payable
inventory
Buying and selling long-term assets are considered _____ activities in the statement of cash flows of a firm. operating noncash financing investing
investing
Net cash flow: is the difference between a firm's operating cash flow and its financing cash flow. is equal to a firm's net income. is the difference between a firm's total expenses and total revenues. is the difference between a firm's actual cash receipts and cash payments in a given period.
is the difference between a firm's actual cash receipts and cash payments in a given period.
Preferred stock is similar to a bond because it has no maturity date it pays a fixed periodic amount it represents ownership in a firm preferred dividends do not reduce a firms taxes
it pays a fixed periodic amount
The systematic risk of an investment is measured by _____. the covariance of its returns its variance of its returns its beta the standard deviation of its returns
its beta
A financial systems primary concern is funneling money from lender-savers to borrower spenders borrower-spenders to lender savers the govt to wealthy individuals wealthy individuals to non-wealthy individuals
lender-savers to borrower spenders
The income statement is: a statement which identifies the changes in the retained earnings account from one accounting period to the next. like a snapshot of a firm's financial position at a particular point in time. like a video recording of a firm's revenues and expenses during a period of time. a summary of a firm's cash receipts and cash payments and investments for a period of time.
like a video recording of a firm's revenues and expenses during a period of time.
According to the balance sheet identity, total assets must equal: total liabilities plus owners' equity. fixed assets plus total debt. current assets plus current liabilities. total shareholders' equity less current assets.
total liabilities plus owners' equity.
If the expected return on an asset is greater than its required return given on the Security Market Line, the stock is _____. fairly priced overpriced underpriced randomly priced
underpriced
investment banking firms provide overdraft facility underwriting services auditing services insurance
underwriting services
Secondary financial markets are similar to direct auction markets used-car markets new car markets direct financial market
used-car markets
The time value of money refers to the issue of What time required to double an amount of money Why people prefer to consume things at some time in the future rather than today What the value of the stream of cash flows is today Why a dollar received tomorrow is worth more than a dollar received today
what the value of the stream of future cash flows is today