Which of the following is considered a part of cash flow from a financing activity in a statement of cash flow?
Increase in corporate bonds
Which of the following is true about a common size balance sheet?
The assets, liabilities, and equities are reported as a percentage of total assets
A firms current ratio has steadily increased over the past 5 years, from 1.9 to 3.8. What would a financial analyst probably conclude from this information?
The firms liquidity position has improved
Which of the following actions can be considered a source of cash when constructing a statement of cash flows?
Increase in long-term bonds
____ is an example of a long-term investment of a firm
Equipment
A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving
FALSE
Which of the following transactions will not effect the quick ratio of a company?
accounts receivable collected
A firm has total assets of $500 million, including its accounts receivable, which worth $120 million. The annual sales of the firm is $650 million. The days sales outstanding ration of the firm is:
66 days
The (DSO) ratio of a firm identifies:
The average length of time a firm must wait after making a credit sale before receiving cash
If a company has a quick ratio of 1.0 and a current ratio of 2.0 then..
The value of current liabilities is equal to the value of the inventory
a low inventory turnover ratio suggests that
the firm is holding excess stocks of inventory
Which of the following is considered by analysts when comparing the operations of two firms that are finance differently?
Earnings before interest and taxes
An inventory turnover ratio of 8.5 times indicates that
the firm will restock inventory every 42 days
Trend analysis is one method of measuring a firms performance over time
TRUE
A firms net income reported on it income statement must equal the operating cash flows on the statement of cash flows
FALSE
Identify the correct expression for the effective annual rate (EAR)
(1 + periodic rate of interest) number of borrowing (interest) period in one year - 1
Which of the following types of annuity best describes the mortgage or rent that you have to pay at the beginning of each month.
Annuity due
If a loan is to be repaid in equal periodic amounts (monthly, quarterly, or annually) it is said to be an amortized loan
TRUE
The process of determining the present value of a cash flow or a series of cash flows to be received or paid in the future is known as
Discounting
When the payment for an annuity is made at the end of each period, such an annuity is referred to as a
ordinary annuity
Everything else equal, the greater the number of compounding periods per year, the greater the effective rate of return that is earned on an investment
TRUE
The present value of an investment increases as the opportunity cost rate increases
TRUE
The effective annual rate of an investment is equal to its quoted interest rate when the investment is compounded
annually
Ordinary annuity is an annuity with payments that occur at the beginning of each period
FALSE
If a loan is to be repaid in equal periodic amounts, it is said to be an amortized loan
TRUE
The process of determining the present value of a cash flow or a series of cash flows to be received or paid in the future is known as _____.
Discounting
Shaun is planning to invest $570 in a mutual fund at the end of each of the next eight years. If his opportunity cost rate is 6 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use a financial calc
5,642
Rebecca is currently working, but is planning to start a college in few years. For this purpose, she would need $20,000. Today she can start investing $750 monthly in an investment account that pays 6 percent compounded monthly. How long would it take her
24.98 months
When the payment for an annuity is made at the end of each period, such an annuity is referred to as a(n) _____.
ordinary annuity
Bill is considering investing $450 at the end of every month in a fixed income instrument. He will be receiving $27,000 at the end of 4 years. If the interest is compounded monthly, what is the annual rate of return earned on the investment?
11.56%
Everything else equal, the greater the number of compounding periods per year, the greater the effective rate of return that is earned on an investment.
TRUE
The present value of an investment increases as the opportunity cost rate increases.
TRUE
Jason's opportunity cost rate is 8 percent compounded annually. How much must he deposit in an account today if he wants to receive $5,400 at the end of each of the next 10 years? Use a financial calculator to determine the amount to be deposited today.
$36,234
Shaun is planning to invest $570 in a mutual fund at the end of each of the next eight years. If his opportunity cost rate is 6 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use a financial calc
$5,642
Ross purchased a new commercial vehicle today for $25,000. The entire amount was financed using a five-year loan with a 4 percent interest rate (compounded monthly). How much will Ross owe on his vehicle loan after making payments for three years?
$10,602.44
An investor invested in a 10-year bond that makes a $50 coupon payment at the end of every six-month period until the bond matures. These coupon payments received by the investor can be referred to as a(an) _____.
Ordinary annuity
The effective annual rate of an investment is equal to its quoted interest rate when the investment is compounded _____.
Annually
Ten years ago, Emma purchased an investment for $22,500. The investment earned 7 percent interest each year. Using the equation method, what is the worth of the investment today?
$44,325
Ordinary annuity is an annuity with payments that occur at the beginning of each period.
FALSE
William buys 20 shares of Zync Corporation at $18.5 per share. Zync pays dividend at the end of each year on the basis of profits made during the year. In its 25 years history, Zync has paid dividends every year without fail. The initial investment by Wil
lump-sum payment; uneven cash flows
LeGo Financials offer two investment plans. Investment A pays 9 percent interest compounded monthly, whereas Investment B pays 10 percent interest compounded semiannually. What are the effective annual rates of the two investments?
9.38%; 10.25%
If Rachel invests $1700 today in an account that pays 6 percent interest compounded annually, how long will it take for her to accumulate $6,500 in her account? Use a financial calculator to determine the amount.
23.02 years
Five years ago, Brian had invested $14,850 in a growth fund. The investment is worth $22,000 today. If the interest was compounded annually, what is the annual rate of return earned on the investment?
8.18%
If the opportunity cost rate is 8% and is compounded annually, what is the present value of $8,200 due to be received in 12 years? Use the equation method to determine the present value.
3,256
Robert invests $650 in a savings account at the beginning of each of the next seven years. If his opportunity cost rate is 5 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use a financial calcula
5,557
Ibiza Corporation has been investing $20,000 for the last four years in an investment scheme that is maturing at the end of the current year. It will be receiving $120,000 at the time of maturity. The $120,000 received at maturity is referred to as _____.
lump sum amount
If a loan is to be repaid in equal periodic amounts (monthly, quarterly, or annually), it is said to be an amortized loan.
TRUE
Identify the correct expression for calculating the present value of an investment.
Present value = future / (1+r)n
An annuity with payments that occur at the beginning of each period is known as a
Annuity due
Bill is considering investing $450 at the end of every month in a fixed income instrument. He will be receiving $27,000 at the end of 4 years. If the interest is compounded monthly, what is the annual rate of return earned on the investment?
11.56%
Sarah invests $2700 today in an account that pays 6 percent interest compounded annually. She wants to know the total balance in her account five years from today. Identify the correct keystrokes to be used in a financial calculator to determine the total
N=5 I=6 PV=-2,700
Shekhar invests $1,820 in a mutual fund at the end of each of the next six years. If his opportunity cost rate is 8 percent compounded annually, how much will his investment be worth after the last annuity payment is made? Use the equation method to calcu
$13,351.39
Ace Inc. is evaluating two mutually exclusive projects�Project A and Project B. The initial cash outflow is $50,000 for each project. Project A results in cash inflows of $15,625 at the end of each of the next five years. Project B results in one cash inf
Project B because it has a high net present value
As compared to the internal rate of return (IRR), the net present value (NPV) technique of capital budgeting is considered a better measure of profitability because:
The net present value technique gives a direct measure of the dollar benefit (on a present value basis) to the firm's shareholders
Two firms�Tangerine Inc. and Cyan Inc. analyze the same project for capital budgeting decision. Tangerine Inc. determines that the project's internal rate of return (IRR) is 9 percent. Cyan Inc. uses the net present value (NPV) method and determines that
Cyan Inc's required rate of return is greater than 9%
Tangerine Inc. is evaluating a capital project for investment. The initial cash outflow in Year 0 is $1,500 followed by cash inflow of $500 each year for four years. Which of the following is the terminal value of the project? Assume the required rate of
$2,389.66
Seattle Inc. identifies an investment opportunity, which will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. The initial cash outflow is $150,000, and the firm's required rate of r
4.86 years
Modified internal rate of return is the discount rate that forces the present value of the terminal value to be equal to _____.
The present value of costs
Smart Solutions Inc. is evaluating a capital project for expansion. The project costs $10,000, and it is expected to generate $5,000 per year for three years. If the required rate of return is 10 percent, what is the terminal value of the project?
$16,550
An insurance firm agrees to pay you $3,310 at the end of 20 years if you pay a premium of $100 per year at the end of each of the 20 years. Find the internal rate of return to the nearest whole percentage point.
5%
As per the payback period method, a project is acceptable to a firm if _____.
The payback period is less than the maximum cost-recovery time established by the firm
An investment project has an initial cost, and then generates inflows of $50 a year for the next five years. The project has a payback period of 3.6 years. What is the project's investment cost?
$180
Seattle Corporation identifies an investment opportunity that will yield end of year cash flows of $30,000 per year in Years 1 through 2, $35,000 per year in Years 3 through 4, and $40,000 in Year 5. This investment will cost the firm $100,000 today, and
$27,104.46
Which of the following statements is true of a project whose cash flows accrue relatively rapidly?
The net present value is not very sensitive to changes in the discount rate.
Project A has a cost of $1,000, and it will produce end-of-year net cash inflows of $500 per year for 3 years. The project's required rate of return is 10 percent. What is the difference between the project's IRR and its MIRR? (Round off the answer to two
5.09%
Two mutually exclusive projects each have a cost of $10,000. The total, undiscounted cash flows from Project L are $15,000, while the undiscounted cash flows from Project S total $13,000. Their NPV profiles cross at a discount rate of 10 percent. Which of
The NPV and IRR methods will select the same project if the required rate of return is greater than 10% , for example, 18%
In capital budgeting analyses, it is possible that for a particular project, the NPV method and the IRR method both involve the reinvestment of the project's cash flows at the same rate.
TRUE
The traditional internal rate of return (IRR) assumes that cash flows are reinvested at the _____.
Projects internal rate of return
Which of the following is an advantage of the modified internal rate of return (MIRR) over the traditional internal rate of return?
Modified internal rate of return assumes that the cash flows are reinvested at the required rate of return
If the NPV of a project is positive, it means that:
Accepting the project increases the value of the firm
Los Angeles Lumber Company (LALC) is considering a project with a cost of $1,000 at Year 0 and inflows of $300 at the end of Years 1-5. LALC's cost of capital is 10 percent. What is the project's modified IRR (MIRR)? (Round off the answer to two decimal p
12.87%
The capital budgeting director of Sparrow Corporation is evaluating a project that costs $200,000, is expected to last for 10 years and produces after-tax cash flows, including depreciation, of $44,503 per year. If the firm's required rate of return is 14
18%
Which of the following statements is true regarding a replacement decision?
The benefits resulting from the new investment is treated as an inflow
Which of the following statements is true about relevant cash flows?
Day to day operating cash flows of a firm are relevant cash flows
Carolina Insurance Company, an all-equity life insurance firm, is considering the purchase of a fire insurance company. The fire insurance company is expected to generate a return of 20 percent with a beta of 2.5. If the risk-free rate is 8 percent and th
23%
Triblaze Corp. is considering buying a new truck. The cost of the truck is $62,000 and the expected cash flows for the next 3 years due to savings from the new truck are $19,920, $22,800, and $31,280. The net present value (NPV) of the truck is ____ if th
-$1,546.81
A project with more corporate risk than average will also have
more beta risk
Stanton Inc. is considering the purchase of a new machine, which will reduce manufacturing costs by $5,000 annually and increase earnings before depreciation and taxes by $6,000 annually. Stanton will use the MACRS method to depreciate the machine, and it
$9,800
If the firm is being operated so as to maximize shareholder wealth, and if our basic assumptions concerning the relationship between risk and return are true, then which of the following should be true?
If the beta of an asset is larger than the corporate beta prior to the addition of that asset, then the required return on the firm will be greater after the purchase of that asset than prior to its purchase.
Chovita Motors Corp. is considering a machine that costs $100,000 that will increase the after-tax net operating income of the company. The net income for the next 3 years is expected to be $30,000, $90,000, and $150,000. The depreciation expense for the
$122,878
Tech Engineering Company is considering the purchase of a new machine to replace an existing one. The current market value of the old machine is $14,000 and its book value is $5,000. The new machine's cost is $30,000. If the tax rate is 40%, the initial i
$19,600
A firm is evaluating a new machine to replace an existing, older machine. The change in depreciation is $3,000. The firm's marginal tax rate is 30 percent. Which of the following statements is true?
Depreciation is added to the after-tax net operating income to calculate the supplemental operating cash flow
Which of the following statements is true while considering an expansion project?
Shipping and installation costs associated with preparing the machine to be used to produce the new product will be part of the initial outlay.
Hill Top Lumber Company is considering building a sawmill in the state of Washington because the company doesn't have such a facility to service its growing customer base that is located on the west coast. Hill Top's executives believe that future growth
The cost of 3 million incurred to clear the land on which Hill Top wants to build the sawmill
Zinc Corp is planning to purchase new machinery. The initial cash outlay is expected to be $40,000 and the required return on investment is 9%. The cash flows for the next 3 years are $9,800, $11,720 and $9,640. Based on net present value (NPV) analysis,
Reject the project as the NPV is (13,700.84)
Trust Engineering Company is considering the purchase of a new machine to replace an existing one. The old machine was purchased 5 years ago at a cost of $20,000, and it is being depreciated on a straight line basis to a zero salvage value over a 10-year
$20,000
Klott Company used scenario analysis and estimated its expected net present value (NPV) as $10,300 and expected standard deviation (?) as $12,083. The coefficient of variation (CVNPV) of Klott's NPV is _____.
1.17
Topsider Inc. is considering the purchase of a new leather-cutting machine to replace an existing machine that has zero salvage value. The net salvage value of the new machine is $6,000 and the return of net working capital is $3,520. Which of the followi
$9,520
Chovita Sports Company evaluated a project as a low-risk project. Chovita generally evaluates projects that are less risky than average by adjusting its required rate of return by 2 percent. If Chovita expects 12% return on average risk projects, then it
10%
Which of the following statements is correct?
Sensitivity analysis is incomplete because it fails to consider the range of likely values of key variables as reflected in their probability distributions.
Risk in a revenue-producing project can best be adjusted for by:
Adjusting the discount rate upward for increasing risk
Which of the following statements is correct?
Undiversified stockholders, including the owners of small businesses, are more concerned about corporate risk than market risk.
The indentures for publicly traded bonds are approved by:
The securities and exchange commission
Which of the following statements is true of the yield to maturity for a bond?
The yield to maturity for a bond that sells at its par value entirely comprises an interest yield and has a zero expected capital gains yield.
Tony's Pizzeria plans to issue bonds with a par value of $1,000 and 10 years to maturity. These bonds will pay $45 interest every 6 months. Current market conditions are such that the bonds will be sold at net $937.79. What is the yield to maturity (YTM)
10%
A bond that can be redeemed for cash at the bondholder's option is called a(n):
Putable bond
An investor just purchased a 10-year, $1,000 par value bond. The coupon rate on this bond is 8 percent annually, with interest being paid every 6 months. If the investor expects to earn a 10 percent simple rate of return on this bond, how much should she
$875.38
A bond that only pays interest if the firm has sufficient earnings to cover the interest payments is called a(n):
Income bond
Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest being paid sem
$550
Which of the following statements is true of a zero coupon bond?
If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10 percent rate of return, and if interest rates then dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value.
The percentage rate of return that investors earn on a bond consists of a(n):
Interest yield plus a capital gains yield
The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the simple annual yield is 14 percent. Given this information, the annual coupon rate on the bond is: (Round the answer to the nearest
17%
Omega Inc. holds a 12-year bond that has a 12 percent coupon rate and a marginal tax rate of 40 percent. It is currently selling for $1,000, which is the bond's face value. If interest is paid semiannually, the bond's yield to maturity is:
0
JRJ Corporation issued 10-year bonds at a price of $1,000. These bonds pay $60 interest every six months. Their price has remained the same since they were issued; that is, the bonds still sell for $1,000. Due to additional financing needs, the firm wishe
2,596
Devine Divots issued a bond a few years ago. The bond has a face value equal to $1,000 and pays investors $30 interest every six months. The bond has eight years remaining until maturity. If an investor requires a 7 percent rate of return to invest in thi
$939.53
Other things held constant, if a bond indenture contains a call provision, the yield to maturity (YTM) on the bond that would exist without such a call provision will be _____ the YTM with the call provision.
lower than
Which of the following is an advantage of convertible bonds?
Investors can choose to hold the company's bonds or convert the bonds into its stock.
Which of the following types of bonds protects a bondholder against increases in interest rates?
Floating-rate bonds
Rick bought a bond when it was issued by Macroflex Corporation 14 years ago. The bond, which has a $1,000 face value and a coupon rate equal to 10 percent, matures in six years. Interest is paid every six months; the next interest payment is scheduled for
$841.15
A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If an investor's simple annual required rate of return is 12 percent with quarterly compounding, how much should the investor be willing to pay for this bond? (Round th
$1,115.57
If the yield to maturity (the market rate of return) of a bond is less than its coupon rate, the bond should be selling at a discount; i.e., the bond's market price should be less than its face (maturity) value.
FALSE
Which of the following events would make it less likely for a company to choose to call its outstanding callable bonds?
An increase in interest rates
25% respectively. The nondiversifiable risks of the stocks as measured by their betas are 0.4, 1.2, 2.5, and 1.75 for Stock A, B, C, and D respectively. The expected returns of the stocks are 12%, 24%, 30%, and 28% respectively. Measure the beta of the po
1.5
On January 3, 2016, the stock price of a firm was $25 and on January 4, 2016, it reduced to $19. Which of the following is a probable reason for the decrease in the stock price?
Increased rate of return
A firm expects to pay dividends at the end of each of the next four years of $2.00, $1.50, $2.50, and $3.50. If growth is then expected to level off at 8 percent, and if you require a 14 percent rate of return, how much should you be willing to pay for th
$43.97
You are trying to determine the appropriate price to pay for a share of common stock. If you purchase this stock, you plan to hold it for 1 year. At the end of the year you expect to receive a dividend of $5.50 and to sell the stock for $154. The appropri
$137.50
A share of perpetual preferred stock pays an annual dividend of $6 per share. If investors require a 12 percent rate of return, what should be the price of this preferred stock?
$50.00
Which of the following is true about a growth stock?
It generally pays little or no dividends so as to retain earnings to help fund developmental opportunities.
The current expected value of a stock is $32. If investors demand a higher rate of return of 10% instead of the 8% rate of return, what will the impact on the stock price of the firm be?
The stock price will decrease.
Nahanni Treasures Corporation is planning a new common stock issue of five million shares to fund a new project. The increase in shares will bring the number of shares outstanding to 25 million. Nahanni's long-term growth rate is 6 percent, and its curren
-$0.85
Darren has the option of investing in either Stock A or Stock B. The probability of the return of Stock A being 25% is 0.45, 14% is 0.25, and 4% is 0.30. The probability of the return of Stock B being 30% is 0.30, 9% is 0.25, and 2% is 0.30. Given the pro
15.95%, 11.85%
Which of the following securities is eligible for a cumulative dividend?
Preferred stock
When using the Dividend Discount Model, assuming that growth (g) will remain constant, under which of the following circumstances will the dividend yield be equal to the required return on a common stock (rs)?
g=0
The constant growth Dividend Discount Model (DDM) may be written as _____.
P0=D1/(rs-g)
The expected returns for Stocks A, B, C, D, and E are 7%, 10%, 12%, 25%, and 18% respectively. The corresponding standard deviations for these stocks are 12%, 18%, 15%, 23%, and 15% respectively. Based on their coefficients of variation, which of the secu
E
If the expected rate of return on a stock exceeds the required rate, it means that _____
The stock is a good buy
On January 1, 2016, the price of a stock is $42.50, whereas on December 31, 2016, the price of the stock is $48.78. Determine the capital gain yield of the stock.
14.78%
The risk-free rate of return is 4%, and the market return is 10%. The betas of Stocks A, B, C, D, and E are 0.85, 0.75, 1.20, 1.35, and 0.5 respectively. The expected rates of return for Stocks A, B, C, D, and E are 7%, 9%, 9.5%, 12.1%, and 14% respective
D
In a given portfolio, replacing an existing investment with a lower beta investment results in _____.
A decrease in the required rate of return of the portfolio
Alpha's preferred stock currently has a market price equal to $80 per share. If the dividend paid on this stock is $6 per share, what is the required rate of return investors are demanding from Alpha's preferred stock?
7.50%
The standard deviation of the returns of Stock A is 45.85%, and the standard deviation of the returns of Stock B is 52.7%. Which of the following statements about the stocks is correct?
Stock A has tighter probability distribution, and hence lower total risk.
Stock A has tighter probability distribution, and hence lower total risk.
greater is the chance that the realized return will differ significantly from the expected return
Alpha Inc.'s beta is 1.2, the risk-free rate is 10 percent, and the market risk premium is 5 percent. Which of the following is Alpha's cost of retained earnings using the capital asset pricing model (CAPM) approach?
16%
The before-tax cost of debt of a firm using funds from bond issue is equal to the _____ of the bond.
yield to maturity
Super Solutions Inc. is a constant growth firm, which just paid a dividend of $3.00, sells for $33.00 per share, and has a growth rate of 6 percent. Which of the following is the cost of retained earnings using the discounted cash flow (DCF) approach? (Ro
15.64%
Omega Inc. has a history of abnormally high growth due to general economic fluctuations. Estimating the cost of common equity using the discounted cash flow approach is difficult because:
The proper growth rate is difficult to establish
Tangerine Inc.'s target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for $1,000. The firm's marginal tax rat
16%
A firm's weighted average cost of capital (WACC) is:
determined by the financial markets because investors provide the funds used by firms and these funds have costs, which are the returns demanded by investors.
Which of the following is true of the change in the weighted average cost of capital of a firm?
A decrease in the weighted average cost of the capital increases the value of the firm.
J. Ross and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. Ross' common stock currently sells for $40 per share. The firm recently paid a dividend of $2 per share on its c
15.50%
The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt.
FALSE
Which of the following may be true of the cost of debt and cost of equity?
The weighted average cost of capital is computed by assigning weights to the cost of debt and the cost of equity of a firm.
Coral Inc.'s preferred stock currently sells for $90 a share and pays a dividend of $10 per share; however, the firm will net only $80 per share from the sale of new preferred stock. What is the firm's cost of newly issued preferred stock? (Round off the
12.50%
A firm should continue to invest in capital budgeting projects until its marginal cost of capital is:
equal to the marginal return generated by the last projected purchase
The _____ of the bond is a cost to the firm for using investors' funds.
Yield to maturity
Smith and Sons Inc. has a target capital structure that calls for 40 percent debt, 10 percent preferred stock, and 50 percent common equity. The firm's current after-tax cost of debt is 6 percent, and it can sell as much debt as it wishes at this rate. Th
$30,000
Which of the following components of capital structure is adjusted to account for tax savings?
Cost of debt
The _____ is equal to the average rate of return that investors require to provide funds to the firm in the form of debt.
Yield to Maturity
The Jackson Company has just paid a dividend of $3.00 per share on its common stock, and it expects this dividend to grow by 10 percent per year, indefinitely. The firm has a beta of 1.50; the risk-free rate is 10 percent; and the expected return on the m
16%
Rollins Corporation is constructing its MCC schedule. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sel
7.20%
Which of the following is a capital component for the purpose of calculating the weighted average cost of capital in capital budgeting?
The after tax cost of long term debt
Which of the following statements is true of the impact of tax on the cost of capital of a firm?
All else being equal, an increase in the corporate tax rate results in a decrease in the weighted average cost of capital.