MGF 301 Midterm 1
To find the present value of an annuity of $100 per year for 10 years at 10 percent per year using the tables, find a present value factor of 6.1446 and multiply it by Blank______.
$100
Which of the following is the formula for the future value of an annuity factor?
((1+r)t−1r)<math xmlns="http://www.w3.org/1998/Math/MathML"><mfenced><mfrac><mrow><mo>(</mo><mn>1</mn><mo>+</mo><mi>r</mi><msup><mo>)</mo><mi>t</mi></msup><mo>-</mo><mn>1</mn></mrow><mi>r</mi></mfrac></mfenced></math>
Which of the following is the general formula for the EAR when m is the number of times interest is compounded in a year?
(1 + quoted rate/m)m − 1
The formula for the present value of an annuity due is:
(1 + r) × (PV of an ordinary annuity).
Long-term liabilities represent obligations of the firm lasting more than Blank______.
1 year
True or false: Inventory turnover is sales divided by inventory.
False
Why is a dollar received today worth more than a dollar received in the future?
Today's dollar can be reinvested, yielding a greater amount in the future.
The formula for the future value of an annuity factor is [(1 + r)t − 1]/r.
True
True or false: An ordinary annuity consists of a level stream of cash flows for a fixed period of time.
True
True or false: Given the PV, FV, and life of the investment, you can determine the discount rate.
True
True or false: If you invest at a rate of r for two periods, under compounding, your investment will grow to (1 + r)2 per dollar invested.
True
True or false: In a common-size income statement, each item is expressed as a percentage of total sales.
True
Which of the following is the correct representation of the cash coverage ratio?
(EBIT + depreciation)/Interest expense
If you invest for a single period at an interest rate of r, your money will grow to Blank______ per dollar invested.
1+r
How is the inventory turnover ratio computed?
Cost of goods sold/Inventory
Which of the following is the appropriate spreadsheet function to convert a quoted rate of 12 percent compounded quarterly to an EAR?
EFFECT(0.12,4)
A general partnership has which of the following characteristics?
Each owner has unlimited liability for all firm debts., All the partners share in gains or losses of the partnership.
Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?
Enron, WorldCom, Tyco
Using the PV, discount rate, and , you can determine the number of periods. (Enter abbreviation only.)
FV
When calculating annuity present values using a financial calculator, the amount is left blank. (Enter the abbreviation only.)
FV
Which of the following is the multi-period formula for compounding a present value into a future value?
FV = PV × (1 + r)t
True or false: The times interest earned ratio is EBIT minus interest.
False
True or false: There is a solid and prescriptive method to select which ratios to use in financial statement analysis.
False
True or false: Using the spreadsheet formula to convert a quoted rate (or an APR) to an effective rate, use the formula NOMINAL(effect_rate, npery).
False
How is the price-earnings (PE) ratio computed?
Market price per share/Earnings per share
Which of the following is the correct formula for calculating the present value of a future amount, expected in t years at r percent interest?
PV = FV/(1 + r)t
FV = × (1 + r)t
PV,
Which of the following represents the receivables turnover ratio?
Sales/Accounts receivable
Which of the following create problems with financial statement analysis?
The firm and its competitors operate under different regulatory environments., The firm or its competitors are conglomerates., The firm or its competitors are global companies.
What does it mean when a firm has a days' sales in receivables of 45?
The firm collects its credit sales in 45 days on average.
Which of the following are true of financial ratios?
They are used for comparison purposes., They are developed from a firm's financial information.
True or false: It is important to investigate trends in financial ratios to identify the reason for the trend.
True
True or false: Profit margin equals net income divided by sales.
True
Which of the following is a perpetuity?
a constant stream of cash flows forever
Which of the following items are used to compute the current ratio?
accounts payable, cash
Which of the following methods are used to calculate present value?
an algebraic formula, a time value of money table, a financial calculator
An annuity with payments beginning immediately rather than at the end of the period is called an Blank______.
annuity due
Future value is the Blank______ value of an investment at some time in the future.
cash
Future value is the value of an investment at some time in the future.
cash
In a present value equation, the rate (r) can be found using the PV, FV, and t. (Enter one word per blank.)
discount
Calculating the present value of a future cash flow to determine its worth today is commonly called Blank______ valuation.
discounted cash flow (DCF)
One step in calculating an EAR is to the quoted rate by the number of times that the interest is compounded.
divide
A dollar received one year from today has Blank______ value than a dollar received today.
less
If a company has inventory, the quick ratio will always be Blank______ the current ratio.
less than
An ordinary annuity consists of a(n) Blank______ stream of cash flows for a fixed period of time.
level
Which one of the following is the correct equation for computing return on assets (ROA)?
net income/total assets
If you invest at a rate of r for periods, under compounding, your investment will grow to (1 + r)2 per dollar invested.
two
The first cash flow at the end of Week 1 is $100, the second cash flow at the end of Month 2 is $100, and the third cash flow at the end of Year 3 is $100. This cash flow pattern is a(n) Blank______ type of cash flow.
uneven
The cash flow that results from the firm's day-to-day activities of producing and selling is called:
operating cash flow.
The present value of an annuity due is equal to the present value of a(n) Blank______ annuity multiplied by (1 + r).
ordinary
A positive operating cash flow indicates that the firm is generating enough cash to:
pay everyday cash outflows.
Ending net fixed assets minus beginning net fixed assets depreciation equals net investment in fixed assets.
plus
Net capital spending is equal to ending net fixed assets minus beginning net fixed assets Blank______.
plus depreciation
The current value of a future cash flow discounted at the appropriate rate is called the Blank______ value.
present
The formula for the Blank______ value interest factor of an annuity is[1 − 1/(1 + r)t]/r.
present
The price-earnings ratio is per share divided by per share.
price, earnings
Return on assets (ROA) is a measure of Blank______.
profitability
Return on equity (ROE) is a measure of Blank______.
profitability
EAR = (1 + rate/m)m − 1
quoted
The profit margin is equal to net income divided by Blank______.
sales
In a common-size income statement, each item is expressed as a percentage of total .
sales,
The owners of a corporation are called Blank______.
shareholders
The times interest earned ratio is a measure of long-term .
solvency
A(n) Blank______ is someone other than an owner or a creditor who potentially has a claim on the cash flows of the firm.
stakeholder
The general formula for Blank______ is (1 + quoted rate/m)m − 1.
the EAR
The DuPont identity breaks ROE into parts.
three
The real world has moved away from using Blank______ for calculating future and present values.
time value of money tables
Which one of the following best explains why financial managers use a common-size balance sheet?
to track changes in a firm's capital structure
A common-size balance sheet expresses accounts as a percentage of Blank______.
total assets
Free cash flow is better described as Blank______.
total distributable cash flow
How is the average income tax rate computed?
total tax bill / total taxable income
Because of Blank______ and Blank______, interest rates are often quoted in many different ways.
tradition; legislation
Which of the following is the correct representation of the total debt ratio?
(Total assets − Total equity)/(Total assets)
Which formula below represents a present value factor?
1/(1 + r)t
A firm with a profit margin of 10 percent generates Blank______ in net income for every dollar in sales.
10 cents
Current assets are defined as assets that can be turned into cash within Blank______ months.
12
Days' sales in receivables is given by the following ratio:
365/receivables turnover
Which of the following spreadsheet functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10 percent per year?
= PV(0.10,10,-100,0,0)
Which of the following processes can be used to calculate the future value of multiple cash flows?
Compound the accumulated balance forward one year at a time., Calculate the future value of each cash flow first and then sum them.
True or false: Ending net fixed assets plus beginning net fixed assets minus depreciation equals net investment in fixed assets.
False
True or false: Financial ratios are computed using only balance sheet information.
False
True or false: Future value refers to the amount of money an investment is worth today.
False
True or false: Given the PV, FV, and payment amount, you can determine the number of periods.
False
True or false: If a company has inventory, the quick ratio will always be greater than the current ratio.
False
True or false: If there is a conflict between market and accounting data, accounting data should be given precedence.
False
True or false: If you invest for two periods at an interest rate of r, then your money will grow to (1 + r) per dollar invested.
False
True or false: The DuPont identity is a popular expression breaking ROA into three parts.
False
True or false: The annuity present value factor equals one minus the discount rate all divided by the present value factor.
False
True or false: The payment for an annuity can be calculated using the annuity present value, the present value factor, and the interest rate.
False
True or false: The price-earnings ratio is price per share times earnings per share.
False
How is the market-to-book ratio measured?
Market value per share/Book value per share
You are solving a present value equation using a financial calculator and are given the number of years for compounding. This should be entered as the Blank______ value on the financial calculator.
N
Which of the following is the correct equation for return on equity?
Net income/Total equity
Is profit maximization the primary objective of a business?
No; profit maximization may not take into account other strategic objectives necessary to maximize shareholder value.
True or false: The annuity present value of an amount C is calculated as c*{1−[1/(1+r)t]r}c*1-1/1+rtr<math xmlns="http://www.w3.org/1998/Math/MathML"><mi>c</mi><mo>*</mo><mfenced open="{" close="}"><mfrac><mrow><mn>1</mn><mo>-</mo><mfenced open="[" close="]"><mrow><mn>1</mn><mo>/</mo><msup><mfenced><mrow><mn>1</mn><mo>+</mo><mi>r</mi></mrow></mfenced><mi>t</mi></msup></mrow></mfenced></mrow><mi>r</mi></mfrac></mfenced></math>
True
True or false: The formula for a present value factor is 1/(1+r)t1/1+rt<math xmlns="http://www.w3.org/1998/Math/MathML"><mn>1</mn><mo>/</mo><msup><mfenced><mrow><mn>1</mn><mo>+</mo><mi>r</mi></mrow></mfenced><mi>t</mi></msup></math>.
True
True or false: The total debt ratio equals the total assets minus total equity divided total assets.
True
True or false: To find the future value of multiple cash flows, calculate the future value of each cash flow first and then sum them.
True
True or false: When calculating the present value of an annuity using the financial calculator, you enter the cash flows of the annuity in the PMT key.
True
An annuity due is a series of payments that are made Blank______.
at the beginning of each period
The effective annual rate (EAR) takes into account the Blank______ of interest that occurs within a year.
compounding
The idea behind Blank______ is that interest is earned on interest.
compounding
The process of accumulating interest in an investment over time to earn more interest is called Blank______.
compounding
A firm with a market-to-book value that is greater than 1 is said to have Blank______ value for shareholders.
created
The current ratio computes the relationship between Blank______.
current assets and current liabilities
"Increasing shareholder wealth" means increasing the Blank______.
current common stock value
Over the past year, the current assets account on the common-size balance sheet of a firm has decreased, while the current liabilities account on the common-size balance sheet of the same firm has increased. The firm has (increased/decreased) its liquidity over the past year.
decreased,
Net capital spending is equal to the change in net fixed assets plus Blank______.
depreciation
The cash coverage ratio adds Blank______ to operating earnings (EBIT) for a better of measure of how much cash is available to meet interest obligations.
depreciation
Cash flow to stockholders equals Blank______.
dividends paid minus net new equity raised
When a firm smooths earnings to please investors, it is called Blank______.
earnings management
Assume interest is compounded monthly. The Blank______ annual rate will express this rate as though it were compounded annually.
effective
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the Blank______ of each period.
end
Spreadsheet functions used to calculate the present value of multiple cash flows assume, by default, that all cash flows occur at the Blank______ of the period.
end
Which of the following are the primary as well as easy ways used to perform financial calculations today?
financial calculator, spreadsheet functions
Which of the following is not a component of cash flow from assets?
financing expenses
The amount an investment is worth after one or more periods is called the Blank______ value.
future
The information needed to compute the profit margin can be found on the Blank______.
income statement
If sales increase while there is no change in accounts receivable, the receivables turnover ratio will Blank______.
increase
A good financial decision will do which of the following?
increase market value of shareholders' equity, increase the value of the firm's existing stock
A perpetuity is a constant stream of cash flows for a(n) Blank______ period of time.
infinite
Cash flow to creditors equals:
interest paid minus net new borrowing.
When finding the present or future value of an annuity using a financial calculator, the Blank______ should be entered as a percentage.
interest rate
Inventory turnover is cost of goods sold divided by .
inventory
Which of the following is a current asset?
inventory
Time value of money tables are not as common as they once were because:
it is easier to use inexpensive financial calculators instead., they are available for only a relatively small number of interest rates.
Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent, while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its Blank______.
liquidity
Time-trend analysis is an example of:
management by exception.
In a shareholder-manager relationship, who is the agent?
managers
The Blank______ tax rate is the tax rate paid on the next dollar of income.
marginal
Whenever Blank______ information is available, it should be used instead of accounting data.
market
The price-earnings (PE) ratio is a Blank______ ratio.
market value
Current assets (plus/minus) current liabilities equals NWC.
minus
The concept of the time value of money is based on the principle that a dollar today is worth Blank______ a dollar promised at some time in the future.
more than
How is ownership transferred in a corporation?
Ownership is transferred by gifting or selling shares of stock.
On a balance sheet, total assets must always equal total liabilities plus:
shareholders' equity.
How is ownership of a corporation represented?
shares of stock
Managerial compensation is often tied to financial performance. One way to make this tie explicit is to offer payment in terms of:
stock options.
A partnership must have at least Blank______ owners.
two
According to the current U.S. corporate tax code, the corporate tax rate in effect for 2021 is Blank______ percent.
21
Blank______ can be used to encourage managers to maximize the value of the stock.
Stock options
The relationship between stockholders and management can best be described as a(n) Blank______ relationship.
agency
In the long run, costs may be considered as Blank______.
all variable
The short run is Blank______.
an imprecise period of time
An organization must prepare Blank______ and bylaws when forming a corporation.
articles of incorporation
Liquidity refers to the ease of changing Blank______.
assets to cash
A company's Blank______ tax rate is its tax bill divided by its total taxable income, and its Blank______ tax rate is the tax rate it pays on the next dollar of income.
average; marginal
A corporation receives cash from financial markets by selling Blank______ and Blank______.
bonds, stocks
The short run is a period when there are Blank______ costs.
both fixed and variable
Which of the following are classified as fixed assets on the balance sheet?
buildings, trademark, equipment
Noncash items do not affect Blank______.
cash flow
In finance, the value of a firm depends on its ability to generate Blank______.
cash flows
Tax rates for proprietorships, partnerships, and LLCs Blank______ with the passage of the Tax Cuts and Jobs Act of 2017.
changed
The Sarbanes-Oxley Act is intended to strengthen protection against:
corporate accounting fraud and financial malpractice
Public limited companies and joint stock companies are other names for Blank______.
corporations
Product costs are usually shown on the income statement under the heading of Blank______.
cost of goods sold
Assets can be categorized as:
current and fixed assets., tangible and intangible assets.
A bad financial decision is defined as a decision that Blank______ shareholder wealth.
decreases
A bad financial decision is defined as a decision that Blank______ shareholders wealth.
decreases
The more debt a firm has, the greater its:
degree of financial leverage.
Which of the following is an example of a noncash item on an income statement?
depreciation
Which of the following are considered non-owner stakeholders in a company?
employees, government, suppliers
Costs that do not change in the short run arise because of Blank______.
fixed commitments
A partnership in which partners share in gains or losses and carry unlimited liability for all partnership debts is called a Blank______.
general partnership
Period costs are the costs that are allocated to a specific Blank______.
interval of time
A sole proprietorship is a business that Blank______.
is owned by one person
Corporations in other countries are often called:
joint stock companies, limited liability companies, public limited companies
A corporation is a distinct Blank______ entity and as such can have a name and take advantage of the legal powers of natural persons.
legal
When a corporation is formed, it is granted which of the following rights?
legal powers to sue, the ability to issue stock
Businesses are motivated to organize as corporations because stockholders in a corporation have Blank______ liability for corporate debts.
limited
Agency costs occur when Blank______ and stockholder interests are not in line with each other.
management
Since Blank______ and ownership are separated, a corporation's life is unlimited.
management
The price at which willing buyers and sellers would trade is called Blank______ value.
market
Interest paid (plus/minus) net new borrowing equals cash flow to creditors.
minus
The balance sheet identity shows that stockholders' equity equals assets Blank______ liabilities.
minus
The last item (or "bottom line") on the income statement is typically the Blank______.
net income
Which of the following are components of cash flow from assets?
operating cash flow, change in net working capital, capital spending
Earnings management is a controversial practice in which corporations Blank______ or Blank______ their earnings to "smooth out" dips and surges and keep investors calm.
overstate; understate
A business without separate legal authority formed by two or more people is known as a Blank______.
partnership
Which one of these is an important mechanism used by unhappy stockholders to replace current management?
proxy fight
Liquidity has two dimensions which are the ability to:
quickly convert assets into cash without significant loss in value.
According to Figure 1.2, where does cash generated by a corporation typically go?
reinvested in the firm, to pay corporate taxes, paid to shareholders and creditors
When one owner or creditor sells to another, the transaction takes place in the Blank______ market.
secondary
Who elects the board of directors and ultimately maintains control of the firm?
stockholders
Physical assets are termed Blank______ assets.
tangible
Operating cash flow _________.
tells us whether or not a firm's cash inflows from its operations are sufficient to cover its everyday cash outflows, is a sign of trouble if negative over a long period of time
A shareholder's liability is limited to which of these?
the amount the shareholder invested in the corporation
The market value of an item is:
the cash value you'd get if you sold it.
Cash flow refers to Blank______.
the difference between the number of dollars that came in and the number that went out
The goal of the financial management is to increase the value of Blank______.
the existing shares of the stock
Changes in capital spending can be negative if:
the firm sold more fixed assets than it purchased.
What is the main goal of financial management?
to maximize the current share value
A sole proprietor has Blank______ personal liability for all business debts and obligations.
unlimited
Financial leverage refers to a firm's Blank______.
use of debt in its capital structure
According to GAAP, when is income reported?
when it is earned or accrued
According to GAAP, when is revenue recognized on an income statement?
when the value of an exchange of goods or services is known or reliably determined, when the earnings process is virtually completed
Which one of these is considered to be the most liquid?
accounts receivable
Net income refers to income earned Blank______.
after interest and taxes
Which of the following are true of a sole proprietorship?
A proprietorship has a limited life., It is one of the simplest types of businesses to form.
The costs incurred due to a conflict of interest between stockholders and management are called Blank______ costs.
agency
Which of the following is the balance sheet equation?
Assets equal liabilities plus stockholders' equity.
Which of the following are reasons that the corporation is the most important form of business?
Corporations are separate legal entities., Corporations can enter contracts., Corporations can sue and be sued.
True or false: "Profit maximization" is the goal for the management of a corporation in the short run only.
False
True or false: Current assets plus current liabilities equals net working capital.
False
Which of these questions can be answered by reviewing a firm's balance sheet?
How much debt is used to finance the firm?, What is the total amount of assets the firm owns?
A balance sheet reflects a firm's:
accounting value on a specific date.
Which of the following are defining features of the primary market?
Proceeds from the sale of securities go to the issuing firm., It is the market where initial public offerings are made.
True or false: A corporation borrows money in its own name.
True
True or false: Free cash flow is also known as cash flow from assets.
True
True or false: In a large corporation, stockholders and managers are usually separate groups.
True
True or false: Interest paid minus net new borrowing equals cash flow to creditors.
True
True or false: Long-term liabilities are not due in the current year (from the date of the balance sheet).
True
True or false: Operating cash flow does not include depreciation or interest.
True
Blank______ changes as the output of the firm changes.
Variable cost