How can a private firm appropriately maximize shareholder value?
By making decisions that keep the control of the business with the owners
Why are American regulators focused on international investing in a global marketplace?
Because international investing in a global marketplace is the concern of American investors
What is one of the two basic types of financial instruments?
Bonds
Which two effects does the unbundling and offshoring of production have on employment when the global value chain is taken into consideration?
Unbundling and offshoring allows firms to offer intermediate and final goods at lower prices, thus increasing employment.
Unbundling and offshoring decreases costs, which results in expansion of sales and higher employment
What is true about the content and structure of a balance sheet?
It reports the assets, liabilities, and equity at a point in time
A company reported an increase in accounts receivable of $5,000 during the recent period. Half of this amount is expected to be collected next period.
How will this change in accounts receivable affect the cash flows from the operating activities section?
The change will decrease cash flows from operations by $5,000
Which statement accurately explains the recognition of revenues and expenses under accounting income and income for tax purposes?
Revenues and expenses are always recognized in the same period for accounting income purposes and income for tax purposes
What is the basic equation for a balance sheet?
Assets=liabilities+equity
What do cash flows from investing activities generally relate to?
A firm's purchase and sale of long-term assets
Which transaction is reflected in cash flow from operating activities?
Cash sales to customers
What does free cash flow represent?
Cash available for distribution after funding required reinvestment
An analyst is comparing the ratios of two different firms and needs to address timing differences.
What would be considered an example of a timing difference between the two firms?
The firms have different fiscal years
A companys year end balance sheet for 2013:
AR: 900
Inventory: 1200
Fixed assets: 1000
AP: 1300
Sales: 4000
Salaries: 275
What is their fixed asset turnover ratio?
Net Sales / Average Net Fixed Assets Sales @ 4000 / Fixed Assets @ 1000= 4.0
A firm has a ROE of 0.27 and the industry average ROE is 0.24
Which conclusion would an analyst draw when comparing the firm to the industry?
The firm is generating higher returns to owners than the industry
What is an example of an inventory method for accounting purposes?
Last in, first out method
A teacher won $100,000 and invests this money for 5 years at an interest rate of 4% (compounded annually).
How much will the teacher have in principal and interest at the end of the 5 years?
N 5, I/Y 4%, PV 100,000, PMT 0, Solve for FV = $121,665
An accountant is 40 years old with an anticipated retirement age of 70 years old. The accountant plans to save $6,000 per year at the end of the next 30 years to fund retirement.
How much will the accountant have upon retirement, if the accountant is able
N 30 yrs., I/Y 4%, PV 0, PMT 6,000, solve for FV = $336,510 or $336,509.6265
An investor deposits $2,000 per year (beginning today) for 10 years in a 4% interest bearing account. The last cash flow is received 1 year prior to the end of the tenth year.
What is the investor's future balance after 10 years?
N 10 yrs, I/Y 4%, PV 0, PMT 2,000, solve for FV = $24,012.21
What is the par value (face value) of a bond?
The sum of money that the corporation promises to pay upon expiration of the bond
A broker is considering purchasing common stock in a company that has average but consistent operating performance.
Which factor should lead the broker to purchase shares in this company?
Intrinsic value is 25% below the current stock price
A broker is considering buying a dividend-paying stock. The dividend will be paid at the end of the year. The analyst consensus is the stock will be worth $36 in one year. The company pays a $2.25 annual dividend (ex dividend date is not a consideration,
$34.15
A person buys shares of a company at $45. They recently paid a $2 annual dividend which is expected to grow by 10% per year.
What is the expected return per year?
14.9%
The market rate of return is 9%. The face value of the bond is $1000, the coupon rate is 9% with annual compounding, and the bond matures in 10 years.
What is the value of the bond?
$1000
Which statement is true about fluctuations in bond prices?
When market interest rates fluctuate, the bond coupon rate is unchanged
A company issues bonds at a market price of $925. The face value is $1000. The bond matures in 10 years, and the coupon rate is 6% compounded semiannually.
What is the yield to maturity (YTM) on the company's bonds?
7.06%
Which securities are issued by local governments and are usually tax exempt at the federal level?
Municipal bonds
A bond pays $27.50 semiannually, matures in 9 years, and is currently priced at $1,090.
What is the yield to maturity for this bond?
4.28%
Why does a long-term bond resemble an interest-only loan?
None of the principle is repaid until the bond matures
Under which circumstances will annual percentage yield (APY) be greater than the annual percentage rate (APR)?
Anytime the number of compounding periods is greater than annual
What is the difference between a common stock and preferred stock?
Skipping a declared preferred stock dividend results in dividends in arrears
Which happens to the risk level in a portfolio as the number of assets in the portfolio increases?
Risk decreases at a slower rate
What are two primary benefits of the capital asset pricing model (CAPM)?
CAPM provides a way to determine the expected return for stocks.
CAPM provides a way to estimate the required returned.
A company has a before-tax cost of common equity of 14%, a pre-tax cost of debt 6%, a cost of preferred equity 8%, and a marginal tax rate of 34%. The current market value of the company is $150 million, with $75 million common equity, $50 million debt, a
9.7%
Which two techniques would be considered effective ways to manage the growth of a firm, if additional financing is not available?
Increase sales prices
Alter capacity
A machine will reach the end of its useful life in year 5. The realizable salvage value is expected to be $50,000 with a book value of zero. The company's marginal tax rate is 34%.
What is the tax implication on the sale of the new machine at year 5?
Tax liabilities of $17,000
What is the acceptance criteria when using internal rate of return to evaluate a project?
Accept when the project return is greater than the required return
A company would like to invest in a capital budget project what will be worth $500,000 in 40 years.
How much should the company invest today, assuming an average inflation rate of 2% and a 10% annual return?
$23, 015
A company has a market value of $500 million.
It has a market value of equity of $200 million, a market value of long-term debt of $150 million.
The cost of equity is 12%, the cost of long -term debt is 8%, and the cost of short-term debt is 6%. The margi
8.37%
What advantage does the capital asset pricing model (CAPM) have over the Gordon growth model?
CAPM considers risk of a stock relative to the market to determine expected returns
Why do companies strive for a lower cost of capital?
Less money dedicated to financing means more money is available for production and operations
A corporation established its projected sales at $210 million. It is using its current year balance sheet as a basis for creating a pro forma balance sheet. They estimate cash will be 7% of projected sales, accounts receivable will be 19% of projected sal
$8 million
Year 2010 ending retained earnings were 2 millions. Year 2011 forecasted sales are $100,000 with a 25% net margin and 20% dividend payout ratio.
What are the forecasted retained earnings for Year 2011?
$2,020,000
How is the amount of discretionary financing that is needed by a firm determined?
Projected total assets- projected total liabilities + projected owner's equity
A company is preparing a pro forma balance sheet. The company forecast $10 million in projected sales. The projected cash needed 6% of sales, AR are 19% of sales, and PP&E are 50% of sales. Accounts payable has been 12% of sales, historically. Shareholder
$1.2 million
Which three pieces of data are needed to perform a capital budget analysis?
The initial cost of the new project
Annual cash flows for the life of the new project
Cash flow when the firm terminates the project
What are two examples of sunk costs?
The cost of a market study conducted prior to the decision
The cost of feasibility consulting incurred before the decision point
Company A has a degree of operating leverage of 1.85 and Company B has a degree of operating leverage of 6.5.
What does the degree of operating leverage say about the two companies?
Company A must have a lower increase in sales than Company B to achieve the same operating income
Which action is an important part of managing accounts receivable?
Setting credit terms
What is the main benefit associated with holding inventory?
It makes it possible to meet the demands of customers
A person needs to determine the cost o replace a company's property, plant, and equipment using the replacement cost method.
Which value does this person need to consider in order to make this determination?
Market value
Which type of investment will a risk-averse investor most likely invest in?
Index funds
Company Y has a greater degree of financial risk than Company Z.
What will happen if there is a 1% decrease in EBT for both companies?
It will result in a greater percentage in Company Y's per-tax profit
How does the anticipation of bankruptcy affect a firm's capital structure?
A firm facing bankruptcy will reduce debt to avoid associated high levels of bankruptcy costs
Why would a company prefer to raise capital by issuing debt instead of issuing new equity?
Debt financing provides interest tax benefits
Which hybrid security system has special claims on a corporations profits or, in case of liquidation, corporate assets?
Preferred Stock
How will an increase in corporate tax rates affect a firm's cost of capital?
The cost of debt will increase
Which financial ratio is used to measure a company effectiveness in extending credit as well as collecting debts?
AR turnover
What is he reason for holding cash and cash equivalents?
To provide liquidity
Which term describes the amount of cash a firm needs in order to pay its immediate bills?
Working capital
How does the Securities Exchange Commission (SEC) regulate the financial industry?
By requiring public disclosure of information about entities that sell public equity or debt
Which company control is required by the Sarbanes-Oxley Act?
Disclosure of off-balance sheet debts
Which document is required to be made available prior to a firm going public, according to the Securities Act 1933?
Prospectus
What does the financial Industry Regulatory Authority (FINRA) examine to determine if a firm is in compliance with rules of FINRA and SEC?
Sales practices
What did the Dodd-Frank Act seek to prevent?
Financial institutions becoming too big to fail
A bond that matures in 30 months is sold at a premium.
What is the yield to maturity (YTM)?
Lower than the coupon rate