A firm’s capital structure refers to the firm’s:
mixture of various types of production equipment.
investment selections for its excess cash reserves.
combination of cash and cash equivalents.
combination of accounts appearing on the left side of its balance sheet.
proportions of financing from current and long-term debt and equity.
For a firm to create value it must:
have a greater cash inflow from its stockholders than its outflow to them.
create more cash flow than it uses.
reduce its investment in fixed assets since fixed assets require the use of cash.
avoid payments to the government so dividends can be increased.
avoid the issuance of debt securities.
Agency costs refer to:
the total dividends paid to stockholders over the lifetime of a firm.
The costs that result from default and bankruptcy of a firm.
corporate income subject to double taxation.
the costs of any conflicts of interest between stockholders and management.
the total interest paid to creditors over the lifetime of the firm.
A stakeholder is any person or entity:
owning shares of stock of a corporation.
owning bonds or other long-term debt issued by a corporation.
that initially started a firm and currently has management control over that firm.
to whom the firm currently owes money.
other than a stockholder or creditor who potentially has a financial interest in the firm.
Which one of these accounts is classified as a current asset on the balance sheet?
intangible asset
accounts payable
preferred stock
inventory
net plant and equipment
Net working capital is defined as:
current assets plus fixed assets.
current assets plus stockholders’ equity.
fixed assets minus long-term liabilities.
total assets minus total liabilities.
current assets minus current liabilities.
An asset that can be quickly converted into cash without significant loss in value is referred to as
being: marketable.
tangible.
intangible.
liquid.
fixed.
An increase in total assets:
means that net working capital is also increasing.
requires an investment in fixed assets.
means that stockholders’ equity must also increase.
must be offset by an equal increase in liabilities and stockholders’ equity.
can only occur when a firm has positive net income.
Which one of the following assets is generally the most liquid?
inventory
buildings
accounts receivable
equipment
patents
Liquidity is:
a measure of the use of debt in a firm’s capital structure.
equal to current assets minus current liabilities.
equal to the market value of a firm’s total assets minus its total liabilities.
valuable to a firm even though liquid assets tend to be less profitable to own.
generally associated with intangible assets.
Book value:
is equivalent to market value for firms with fixed assets.
is based on historical cost.
generally tends to exceed market value when fixed assets are included.
is more of a financial than an accounting valuation.
is adjusted to market value whenever the market value exceeds the stated book value.
Projected future financial statements are called:
plug statements.
pro forma statements.
reconciled statements.
aggregated statements.
comparative statements.
Which statement expresses all accounts as a percentage of total assets?
pro forma balance sheet
common-size income statement
statement of cash flows
pro forma income statement
common-size balance sheet
Ratios that measure a firm’s ability to pay its bills over the short run without undue stress are known
as:
asset management ratios.
long-term solvency measures.
liquidity measures.
profitability ratios.
market value ratios.
The current ratio is measured as:
current assets minus current liabilities.
current assets divided by current liabilities.
current liabilities minus inventory, divided by current assets.
cash on hand divided by current liabilities.
current liabilities divided by current assets.
Ratios that measure a firm’s financial leverage are known as ________ ratios.
asset management
long-term solvency
short-term solvency
profitability
market value
The debt-equity ratio is measured as:
total equity divided by long-term debt.
total equity divided by total debt.
total debt divided by total equity.
long-term debt divided by total equity.
total assets minus total debt, divided by total equity.
The equity multiplier is measured as total:
equity divided by total assets.
equity plus total debt.
assets minus total equity, divided by total assets.
assets plus total equity, divided by total debt.
assets divided by total equity
A banker considering loaning money to a firm for ten years would most likely prefer the firm have a
debt ratio of _______ and a times interest earned ratio of _______.
.50; .75
.50; 1.00
.45; 1.75
.40; .75
.40; 1.75
The higher the inventory turnover, the:
less time inventory items remain on the shelf.
higher the inventory as a percentage of total assets.
longer it takes a firm to sell its inventory.
greater the amount of inventory held by a firm.
lesser the amount of inventory held by a firm.
A flow of unending and equal payments that occur at regular intervals of time is called a(n):
annuity due.
indemnity.
perpetuity.
amortized cash flow stream.
amortization table.
An interest rate that is compounded monthly, but is expressed as if the rate were compounded
annually, is called the _____ rate.
stated interest
compound interest
effective annual
periodic interest
daily interest
A perpetuity differs from an annuity because:
perpetuity payments vary with the rate of inflation.
perpetuity payments vary with the market rate of interest.
perpetuity payments are variable while annuity payments are constant.
perpetuity payments never cease.
annuity payments occur at irregular intervals of time.
The annual percentage rate:
considers interest on interest.
is the actual cost of a loan with monthly payments.
is higher than the effective annual rate when interest is compounded quarterly.
is the interest rate charged per period divided by (1 + n), when n is the number of periods per year.
equals the effective annual rate when the interest on an account is designated as simple
interest.
The net present value of a project is equal to the:
present value of the future cash flows.
present value of the future cash flows minus the initial cost.
future value of the future cash flows minus the initial cost.
future value of the future cash flows minus the present value of the initial cost.
sum of the project’s anticipated cash flows.
You plan to invest $6,500 for three years at 4 percent simple interest. What will your investment be
worth at the end of the three years?
rev: 03_16_2016_QC_CS-45495
$7,280.00
$7,311.62
$7,250.00
$6,924.32
$6,760.00
Investment value Year 3 = $6,500 + ($6,500 × .04 × 3) = $7,280
Shawn has $2,500 invested at a guaranteed rate of 4.35 percent, compounded annually. What will
his investment be worth after five years?
$2,997.04
$3,288.00
$3,321.32
$3,093.16
$2,857.59
FV5 = $2,500 × 1.04355 = $3,093.16
Your parents plan to give you $200 a month for four years while you are in college. At a discount
rate of 6 percent, compounded monthly, what are these payments worth to you when you first start
college?
$8,797.40
$8,409.56
$8,198.79
$8,516.06
$8,279.32
APV = $200 × [(1 – {1 / [1 + (.06 / 12)]4 × 12}) / (.06 / 12)] = $8,516.06
you just won the lottery! As your prize you will receive $1,500 a month for 150 months. If you can
earn 7 percent, compounded monthly, on your money, what is this prize worth to you today?
$137,003.69
$149,676.91
$137,962.77
$148,104.26
$150,723.76
APV = $1,500 × [(1 – {1 / [1 + (.07 / 12)]150}) / (.07 / 12)] = $149,676.91
Olivia is willing to pay $185 a month for four years for a car payment. If the interest rate is 4.9
percent, compounded monthly, and she has a cash down payment of $2,500, what price car can she
afford to purchase?
$10,961.36
$10,549.07
$8,533.84
$8,686.82
$8,342.05
PV = $2,500 + {$185 × [(1 – {1 / [1 + (.049 / 12)]4 ×12}) / (.049 / 12)]} = $10,549.07
You have $2,500 to deposit into a savings account. The five banks in your area offer the following
rates. In which bank should you deposit your savings?
Bank A: 3.75%, compounded annually
Bank B: 3.69%, compounded monthly
Bank C: 3.70% compounded semi-annually
Bank D: 3.67% compounded continuously
Bank E; 3.65% compounded quarterly
EAR Bank A = [1 + (.0375 / 1)]1 – 1 = .03750, or 3.750%
EAR Bank B = [1 + (.0369 / 12)]12 – 1 = .03753, or 3.753%
EAR Bank C = [1 + (.0370 / 2)]2 – 1 = .03734, or 3.734%
EAR Bank D = e.0367 – 1 = .03738, or 3.738%
EAR Bank E = [1 + (.0365 / 4)]4 – 1 = .03700, or 3.700%
Bank B offers the highest EAR.
Thirty-five years ago, your father invested $2,000. Today that investment is worth $98,407. What
rate of return has your father earned on his investment?
10.94%
11.33%
10.50%
11.77%
9.99%
$98,407 = $2,000 ×(1 + r)35; r = .1177, or 11.77%
Assume you could invest $25,000 at a continuously compounded rate of 10 percent. What would
your investment be worth at the end of 50 years?
$2,933,054
$3,500,824
$3,911,215
$3,710,329
$3,648,029
$25,000 × e.10 × 50 = $3,710,329
Stu can purchase a one-bedroom house near his college today for $110,000, including the cost of
some minor repairs. He expects to be able to resell it in four years for $150,000 if he just puts a little
effort into cleaning up the property. At a discount rate of 6.5 percent, what is the expected net
present value of this purchase opportunity?
$3,001.61
$2,487.43
$6,598.46
$7,208.18
$4,311.02
NPV = −$110,000 + $150,000 / (1 + .065)4 = $6,598.46
Lucas invested $4,500 at 6.2 percent, compounded continuously. What will his investment be worth
after 15 years?
$15,557.78
$9,240.03
$11,405.29
$12,308.84
$8,685.00
FV = $4,500 × e.062 × 15 = $11,405.29
You want to save sufficient funds to generate an annual cash flow of $55,000 a year for 25 years as
retirement income. You currently have no retirement savings but plan to save an equal amount each
year for the next 38 years until your retirement. How much do you need to save each year if you can
earn 7.5 percent on your savings?
$3,333.33
$2,640.85
$3,146.32
$2,889.04
$3,406.16
PV = $55,000 × ({1 – [1 / (1 + .075)25]} / .075) = $613,082.02 $613,082.02 = C × {[(1 + .075)38 −1] /
.075}; C = $3,146.32
Scott has been offered a 10-year job at a starting salary of $65,000 and guaranteed annual raises of
5 percent. What is the current value of this offer at a discount rate of 7 percent?
$638,724.17
$602,409.91
$558,845.85
$630,500.00
$525,000.00
PV = $65,000 × [(1 – {[(1 + .05) / (1 + .07)]10}) / (.07 – .05)] = $558,845.85
Jeanette expects to live 30 years after she retires. At the end of the first year of her retirement, she
wants to withdraw $35,000 from her savings. Each year thereafter, she wants to increase her annual
withdrawal by 3.5 percent. If she can earn 5.5 percent on her savings, how much does she need to
have in retirement savings on the day she retires?
$862,001.34
