FIN 3403 Exam 1

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A good financial decision will do which of the following?
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In large firms, financial activity is usually associated with which top officer?Chief financial officerThe relationship between stockholders and management can best be described as a _________ relationship.AgencyBecause shareholders get paid last after all other obligations are satisfied, they are often called:Residual ownersThe owners of a corporation are called ________.ShareholdersA corporation receives cash from financial markets by selling ________ and _________.Bonds StocksThe controller is responsible for which of the following tasks?Tax reporting Financial accountingHow is ownership transferred in a corporation?Ownership is transferred by gifting or selling stocks.What is true of a sole proprietorship?It is the simplest type of business to form. A proprietorship has a limited life.What are among the most important questions to be asked when a business is started?What long-term investments should be made? How will everyday financial activities be handled? Where will long-term financing be obtained to pay for investments?The life of a corporation unlimited.Net working capital is defined as current assets minus current ________.liabilitiesWhen one owner or creditor sells to another, the transaction takes place in the _________ market.secondaryA business without separate legal authority formed by two or more people is known as a __________.partnershipA sole proprietorship is a business owned by ________ person(s).one___________ budgeting is the process of making and managing expenditures on long-term assets.CapitalWhich of the following are included in a firm's capital structure?Equity Long-term debtWhich corporate officer is responsible for accurate financial reporting of the firm's activities?ControllerWhich of the following are important when considering a partnership?Fund raising limitations Personal liability for firm debts Taxation of partnership incomeIf you hire a real estate company to sell your house, you are most apt to encounter which one of the following?Agency problemA ___________ is someone other than an owner or a creditor who potentially has a claim of the cash flows of a firm.stakeholderWhich one of these provides a manager an incentive to perform well?Job prospectsThe Sarbanes-Oxely Act requires corporate officers to do which of the following?Accept responsibility for material errors in the annual report. List any deficiencies in internal reports. Confirm the validity of the annual financial reporting.The costs incurred due to a conflict of interest between stockholders and management are called __________.Agency costsIn a limited partnership, a limited partner's liability for business debts is to their cash contribution to the company.The federal government taxes which of the following?Corporate earnings and shareholders dividends.A general partnership has which of the following characteristics?Each owner has unlimited liability for all firm debts. It is difficult to transfer ownership.Which one of these motivates managers to make good decisions?Threat of hostile takeover.The goal of a for-profit business is to _______ existing owners' equity.maximizeIn a shareholder-manager relationship, who is the agent?ManagersThe rules used by a corporation to regulate its existence are known as ___________.bylawsIndirect agency costs are often due to lost __________.opportunitiesCorporations in other countries are often called:Joint stock companies Public limited companiesA limited liability company is taxed like a _________ and its owners have _________ liability.partnership; limitedWhich one of the following parties would be the last party to receive payment if a firm were to close? Assume all parties have a legitimate claim on the firm's assets.ShareholdersThe financial goal of profit maximization is associated with which of the following?Maintenance deferment Critical inventory reduction Cost cutting__________ are frequently used to encourage key managers to maximize the value of the firm's stock.Stock optionsA shareholders' liability is limited to which of these?The amount the shareholder invested in the corporation.Which one of these is an important mechanism used by unhappy stockholders to replace current management?Proxy fightAn organization must prepare ___________ and bylaws when forming a corporation.articles of incorporationWhat is the main goal of financial management?To maximize shareholder wealthWhat is the primary purpose of awarding stock options to managers?To increase shareholders' wealthInitial public offerings of stock occur in the _______ market.primaryThe trading of existing shares occurs in the ________ market.secondaryNASDAQ has which of these features?Multiple market maker system. Computer network of securities dealers.Stock price reporting has increasingly moved from traditional print media to the _______ in recent years.internetThe NYSE differs from the NASDAQ primarily because the NYSE has:Specialists An auction market A physical locationA person who brings buyers and sellers together is called a(n) __________.brokerSomeone who maintains an inventory of stocks and buys and sells those stocks is known as a ________.dealerThe two most important stock markets in the U.S. are the New York Stock Exchange and ________.NASDAQWhich of the following are current assets?Inventory Accounts receivableWhat does GAAP stand for?Generally accepted accounting principlesWhich of the following are included in a firm's inventory?Work in process Raw materials Finished goodsRank the ease of turning the following assets into cash.Cash equivalents Accounts receivable Inventory Plant and equipmentFixed costs are costs that will not change due to _______.fixed commitments over a stated period of timeAssets can be described as items that:Provide market value to the firm. Generate revenue. A firm owns.Net working capital equals ________.current assets minus current liabilities.A balance sheet reflects a firm's _______ value on a particular date.accountingThe accounting equation shows that stockholders' equity equals assets ______ liabilities.minusA customer has yet to pay the bill for products purchased on credit. This debt is recorded in which balance sheet account?Accounts receivableLiquidity refers to the ease of changing _________.assets to cashWhich of the following are included in the fixed asset portion of a balance sheet?Trademarks Accumulated depreciationThe price at which willing buyers and sellers would trade is called ________ value.marketWhich of the following are classified as liabilities on a firm's balance sheet?Deferred taxes Accounts payableWhich of the following is a variable cost in the short run?Raw materialsWhich one of the following is shown on the left-hand side of the balance sheet?Fixed assetsWhich of these are generally considered to be short-run fixed costs?Management salaries Property taxes Overhead expensesDepreciation is the accountant's estimate of the cost of _________ used up in the production processequipmentThe more debt a firm has, the greater its:degree of financial leverageWhich are true concerning product costs?Product costs are reported as costs of goods sold. Product costs contain both fixed and variable costs.Long term liabilities represent obligation of the firm lasting over ________.1 yearHow is income defined?Revenue minus expensesOn which side of the balance sheet do liabilities appear?The right sideThe short run for a firm is the period of time during which ________.Output can vary Some costs are fixedWhich of the following are examples of short-run fixed costs?Bond interest RentWho is entitled to the residual value of a firm's cash flows?ShareholdersWhich of the following do not directly affect cash flow?DepreciationHow is the average income tax rate computed?Total tax bill/Total taxable incomeIn the long-run, __________ are variable.all costsA decrease in depreciation expense __________ earnings per share.increasesFor financial decision-making purposes, the most important tax rate is the ________ tax rate.marginalIncreasing its non-cash liquid assets will enable a firm to do which of the following?Increase its ability to avoid financial distress. Increase its ability to meet short-term obligations.Which of the following are period costs?Selling costs General expenses Administrative expensesAccording to GAAP, when is income reported?When it is earned or accruedWhich of the following is an example of a non-cash item on an income statement?DepreciationWhich of these questions can be answered by reviewing a firm's balance sheet?What is the total amount of assets the firm owns? How much debt is used to finance the firm?What does stockholders' equity represent?A residual claim against the firm's assetsMarginal tax rates are the most important tax rates because:Financial decisions are usually based on new cash flows. Incremental cash flows are taxed at marginal tax rates.Accountants usually distinguish between _______ costs and _______ costs.product; periodThe short run is imprecise period of timeWhich of the following is true about U.S. modified flat-rate tax system?The tax rate becomes flat at very high income levels._______ is the income subject to tax.Taxable income_______ income is money earned after interest and taxes.NetWhat should you keep in mind when examining an income statement?Cash versus non-cash items Time and costs GAAPHow are assets on a balance sheet listed?In order of decreasing liquidity.Which of these is NOT shown on a balance sheet?Good management Favorable economic conditions Proprietary assetsA company's _____ tax rate is its tax bill divided by its total taxable income, and its _______ tax rate is the tax rate its pays on the next dollar of income.average; marginalIf your tax bill is $200 and your taxable income is $2,000, then your average tax rate is _____ percent.10What is a primary concern for a bank lending funds to a business for the short term?LiquidityWhen is revenue recognized on an income statement?When the exchange of goods or services is completed. When the earnings process is virtually completed.Accounting profit ______ cash flow.differs fromIn the long run, all costs are _____.variableWhat is the purpose of the income statement?To measure performance over a set period of time.Under a flat-rate tax, all income levels are taxed at _____.The same average rate. The same marginal rate.Given the tax rates of 15% on Income from $0 to $50,000, 25% on income from $50,001 to $75,000, and 34% on income from $75,001 to $100,000, approximately how much tax would a company pay on a taxable income of $60,000?(.15)(50,000)+(.25)(10,000) = $10,000Why is positive net working capital important?It means the firm should have sufficient cash to meet its current obligations.The U.S. tax rate becomes a flat-rate tax in practice at approximately what corporate income level?$18 millionGiven the corporate tax rates of 15% on income from $0 to $50,000, 25% on income from $50,001 to $75,000, and 34% on income from $75,001 to $100,000, approximately how much tax would a company pay if it had taxable income of $90,000?(.15)(50,000)(.25)(25,000)(.34)(15,000)= $18,850The 38 percent tax bracket is ____.the result of a surcharge.Non-cash items are ______ that _____ cash flow.expenses; do not directly affectAccording to the U.S. tax code, marginal and average tax rates equalize at a final tax rate of ______ percent35True or False: Appreciation of property will be recognized as income even if not realized.FalseWhich of the following are sources of cash?A decrease in accounts receivable. An increase in notes payable.True or False: The formula for a present value factor is (1)/(1+r)^tTrueTime value of money tables are not as common as they once were because:They are available for only a relatively small number of interest rates. It is easier to use inexpensive financial calculators instead.How long it will take $40 to grow to $240 at an interest rate of 6.53% compounded annually?28.33 yearsWhich of the following methods can be used to calculate present value?A time value of money table An algebraic formula A financial calculatorIf $100 earns compound interest for 2 years at 10 percent per year, the future value will be ______.FV= $100 x 1.10^2= $121Why is a dollar received today worth more than a dollar received in the future?Inflation will make a dollar in the future worth less than a dollar today. Today's dollar can be reinvested, yielding a greater amount in the future.If you want to know how much you need to invest today at 12% compounded annually in order to have $4,000 in five years, you will need to find a(n) ______ value.presentIf you invest for a single period at an interest rate of r, your money will grow to ____ per dollar invested.(1 + r)Which of the following can be determined using the future value approach to compound growth developed in this chapter?Sales growth Population growth Dividend growthWhich of the following is the multi-period formula for compounding a present value into a future value?FV= PVx(1+r)^tThe idea behind ______ is that interest is earned on interest.compoundingWhich of the following is the correct mathematical calculation of the future value of $100 invested today for 3 years at 10% per year?FV= $100 x (1.10)^3What is the future value of $100 compounded for 50 years at 10 percent annual interest?$11,739.09You invest $500 at 10 percent. At the end of 2 years with simple interest you will have ____ and with compound interest you will have _____.$600; $605If you invest $100 at 10 percent simple interest, how much will you have in 10 years?FV= $100 + 10($100 x .10)= $200Suppose we invest $100 now and get back $236.74 in 10 years. What rate of interest will we achieve?($236.74/$100)^(1/10)-1= 9%The basic present value equation underlies many of the:Most important ideas in corporate financeWhat is the future value of $100 at 10 percent simple interest for 2 years?$100+2(.10x$100)= $120The basic present value equation is:PV=FV^t= (1+r)^tSuppose present value is $100, future value is $1,000, and N is 10 years. Which formula below is used to find the (decimal) interest rate?(1000/100)^(1/10)-1If the interest rate is 10% per year and there are 10 years, what is the present value discount factor?1/(1.10)^10= .3855What s an effective annual rate of 12.36 percent equal to?EAR= (1+.12/2)^2-1= 12.36% 12%, compounded semiannuallyWhich of the following are annuities?Installment loan payments Monthly rent paymentsIn the Excel setup of a loan amortization problem, which of the following occurs?To find the principal payment each month, you subtract the interest payment from the total payment. The payment is found using PMT(rate, nper, -pv, fv).Because of _________ and __________, interest rates are often quoted in many different waystradition; legislationWhich of the following is true about a growing annuity?The cash flows grow at a constant rate. The cash flows grow for a finite period.Most investments involve:multiple cash flowsWhich of the following are ways to amortize a loan?Pay principle and interest every period in a fixed payment. Pay the interest each period plus some fixed amount of principle.In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _________ of each period.endWhich of the following payment methods amortizes a loan?Fixed payments that result in a zero loan balance. Interest plus fixed amount.The entire principle of an interest-only loan is the:original loan amountWhich of the following processes can be used to calculate future value for multiple cash flows?Calculate the future value of each cash flow first and then add them up. Compound the accumulated balance forward one year at a time.Which of the following is true about a partial amortization loan?The amortization period is longer than the loan period. The monthly payments do not fully pay off the loan by the end of the loan period. The borrower makes a large balloon payment at the end of the loan period.Which compounding interval will result in the lowest future value assuming everything else is held constant?AnnualA credit card charges 1.5 percent interest each month. What is the EAR?(1.015)^12-1= 19.56%The present value interest factor for a 30-year annuity with an interest rate of 10 percent per year is ______.[1-(1/1.10^30)]/.10]= 9.4269The payments in a ______ amortization loan are NOT based on the life of the loan.partialA perpetuity is a constant stream of cash flows for a(n) ______ period of time.infiniteThe general formula for the ______ is (1+r/m)^m-1.EARWhich of the following are true about the amortization of a fixed payment loan?The principle amount paid increases each period. The amount of interest paid decreases each period.What are two ways to calculate a balloon payment?Find the present value of the payments remaining after the loan term. Amortize the loan over the loan life to find the ending balance.The present value formula for a(n) _______ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.perpetuityAnother common term for the effective annual rate (EAR) is the:APYA growing annuity has a(n) ______.finite number of growing cash flowsAn annuity due is a series of payments that begin _______.immediatelyC/r is the formula for the present value of a(n) _______.perpetuityWhich of the following is the simplest form of loan?A pure discount loanWith interest-only loans that are not perpetuities, the entire principal is:repaid at some point in the future.For a subsidized Stafford loan:Interest does not accrue until repayment beginsFor a positive stated annual interest rate and multiple compounding periods per year, the EAR is always _____ the APR.larger than