The world of finance can be divided into three broad areas, the banking system,
financial management and investments/financial markets.
A privately held, or closely held, company is one in which the stock is held by a few
investors and cannot be sold to other people without permission of the other
shareholders.
In a manufacturing firm, there are two inventory accounts, called raw materials and
finished goods.
Although depreciation is a noncash expense, the government still allows the deduction
on the firm’s tax return.
In financial mergers, the acquiring company may not have any expertise in the target
company’s business.
Retained earnings are not free because stockholders deserve a return on invested funds
regardless of the source of those funds.
Transit float in the check clearing system is the time required for checks to clear
through the banking system.
The simplest approach for forecasting financial statements for an established business is
the modified percentage of sales method, which involves estimating the company’s
sales growth rate, and then assuming that all income statement and balance sheet line
items grow at the same rate.
Adding debt decreases EBIT and Net Income because of increased interest charges. It
also increases financial risk which tends to make risk averse investors sell their stock.
Therefore, more leverage generally reduces ROE and EPS and always reduces stock
price.
The clientele effect argues that only firms with high payout ratios can successfully
attract investors.
The secondary market is the resale market for securities.
Put option values ____, while call option values ____ as the relevant stock price rises.
A.fall, fall
B.fall, rise
C.rise, fall
D.rise, rise
Which of the following is not affected by a change in interest expense?
A.Gross margin
B.EBIT
C.ROE
D.a and b
E.All of the above
The fixed asset turnover ratio is influenced by:
A.the age of the assets employed.
B.the depreciation method used by the firm.
C.the firm’s choice of a production technology.
D.All of the above
What is the effective interest rate on a 12% loan that requires a 10 percent minimum
compensating balance?
A.13.33 percent
B.14.44 percent
C.15.50 percent
D.16.00 percent
The NPV and IRR derived from estimated cash flows for a capital budgeting project
are:
A.essentially expected values or means.
B.likely to differ from the actual results of the project.
C.random variables with their own probability distributions.
D.All of the above
Assume the following facts about a firm that sells just one product:
What is the firm’s monthly breakeven volume in units?
A.417 units
B.1,250 units
C.5,000 units
D.1,667 units
The currencies of ____ have traditionally not been convertible.
A.China
B.Great Britain
C.Russia
D.a and c
E.All of the above
Baker Corporation conducted the following activities during 2001: (1) they sold 10,000
shares of their own stock for $20.00 per share; (2) they issued bonds for which they
received $500,000; (3) they paid dividends to their stockholders totaling $85,000; (4)
they sold a piece of equipment for $50,000 that they were carrying on their books for
$20,000; (5) they earned net income of $140,000. What would be shown on the
Statement of Cash Flows for “cash from financing activities” based on the information
above?
A.$615,000
B.$650,000
C.$655,000
D.$700,000
E.$740,000
All of the following are components of carrying costs except:
A.insurance.
B.storage costs.
C.deterioration.
D.set-up costs.
Six years ago you paid $20 per share for 100 shares of stock. Today you sold the 100
shares for $30 per share. Determine the average annual rate of return on your
investment, assuming the stock paid no dividends.
A.25%
B.8.33%
C.150%
D.7%
Established through the Securities Exchange Act of 1934, the Securities and Exchange
Commission is charged with the responsibility to:
A.oversee financial market activities.
B.promote fairness in stock dealings in public and private companies.
C.enforce the laws preventing certain manipulative and deceptive behavior.
D.a and c
Which of the following is a consumption tax?
A.Ad valorem tax
B.Real estate tax
C.Excise tax
D.Personal property tax
You have been assigned to estimate the interest rates that your company may have to
pay when borrowing money in the near future. The following information is available.
kPR= 2%
MR = 0.1% for a 1 year loan increasing by 0.1% for each additional year
LR = 0.05% for a 1 year loan increasing by 0.05% for each additional year
DR = 0 for a 1 year loan, 0.2% for a 2-year loan, increasing 0.1% for each additional
year
Expected Inflation Rates
Year 1 = 7%
Year 2 = 5%
Year 3 and thereafter = 3%
A firm has the following financial statements and paid a $1,000 dividend during the
year.
a. Calculate cash from operating activities showing the current account changes
separately.
b. Calculate cash from financing activities.
c. Calculate cash from investing activities.
d. Develop a statement of cash flows including a reconciliation with the cash account.
Financial leverage may benefit shareholders when the:
A.return on capital employed is greater than the after tax cost of debt.
B.return on equity is greater than the cost of debt.
C.return on investments is less than the cost of capital.
D.None of the above
An outlay of $180,000 is expected to yield the following cash flows:
YearNet Cash Flow
1 75,000
2 55,000
3 60,000
4 25,000
5 15,000
6 10,000
The cost of capital is 12 percent. What is the NPV?
A.$8,505
B.$5,070
C.$3,525
D.$2,982