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Finance Flashcards

Business Finance

Uptown Markets is financed with 45 percent debt and 55 percent equity. This mixture of debt and equity is referred to as one of the firm’s:a) capital structureb) capital budgetc) asset allocationd) working capitale) risk structure Capital structure
Margie opened a used bookstore and is both the 100 percent owner and the store’s manager. Which type of business entity does Margie own if she is personally liable for all the store’s debts?a) general partnershipb) limited partnershipc) corporationd) sole proprietorship Sole proprietorship
Jamie is employed as a currency trader in the Japanese yen market. Her job falls into which once of the following areas of finance?a) capital managementb) corporate financec) international financed) financial institutionse) personal finance international finance
Capital budgeting includes the evaluation of which of the following?a) risk and size of future cash flows onlyb) size, timing, and risk of future cash flowsc) size and timing of future cash flows onlyd) size of future cash flows only size, timing, and risk of future cash flows
The goal of financial management is to increase the:a) number of shares outstandingb) current market value per sharec) dividends paid per shared) book value of equity current market value per share
The Serbanes-Oxley Act in 2002 was primarily prompted by which one of the following from the 1990s?a) increased use of tax loopholesb) increased foreign investment in US stock marketsc) corporate accounting and financial fraud d) increased stock market volatility corporate accounting and financial fraud
Which one of the following parties can sell shares of ABC stock in the primary market?a) only officers and directors of ABC companyb) ABC companyc) any corporation, other than ABC companyd) any institutional shareholder ABC company
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Finance Flashcards

corporate finance chapter 7

dividend growth model a model that determines the current price of a stock as its dividend next period divided by the discounted rate less the dividend growth rate
dividend yield a stock’s expected cash dividend divided by its current price
capital gains yield the dividend growth rate, or the rate at which the value of an investment grows
cumulative voting a procedure in which a shareholder may cast all votes for one member of the board of directors
common stock equity without priority for dividends or in bankruptcy
straight voting a procedure in which a shareholder may cast all votes for each member of the board of directors
proxy a grant of authority by a shareholder allowing another individual to vote that shareholder’s shares.
dividends payments by a corporation to shareholders, made in either cash or stock.
preferred stock stock with dividend priority over common stock, normally with a fixed dividend rate, sometimes without voting rights.
primary market the market in which new securities are originally sold to investors.
secondary market the market in which previously issued securities are traded among investors.
dealer an agent who buys and sells securities from inventory
broker an agent who arranges security transactions among investors
member as of 2006, a member is the owner of a trading license on the NYSE
commission brokers NYSE members who execute customer orders to buy and sell stock transmitted to the exchange floor
specialist an NYSE member acting as a dealer in a small number of securities on the exchange floor; often called a market maker
floor brokers NYSE members who execute orders for commission brokers on a fee basis; sometimes called $2 brokers.
SuperDOT system an electronic NYSE system allowing orders to be transmitted directly to the specialist
floor traders NYSE members who trade for their own accounts, trying to anticipate temporary price fluctuations
order flow the flow of customer orders to buy and sell securities
specialist’s post the fixed place on the exchange floor where the specialist operates
inside quotes the highest bid quotes and the lowest ask quotes for a security
electronic communications networks (ECNs) web sites that allow investors to trade directly with one another
stock price the dividend growth model makes the implicit assumption that the _________ ________ will grow at the same constant rate as the dividend. if cash flows on an investment grow at a constant rate through time, the value of that investment grows at the same rate as the cash flows.
No. Investors who don’t like the voting features of a particular class of stock are under no obligation to buy it. is it unfair or unethical for corporations to create classes of stock with unequal voting rights?
stock value the current_________ ________ reflects the risk, timing, and magnitude of all future cash flows, both short-term and long-term.
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Finance Flashcards

finance review

What would be the anticipated effect of a corporate dividend poliies if dividends were taxed as ordinary income? Cash dividends would likely decrease and stock repurchases would likely increase
WOTF would tend to lower a firms use of debt a decrease in corporate tax rates
The reason maximizing expected profits should not be your financial objective is that it ignores the amount of risk taken
WOTF terms of credit has the highest effective interest cost 2/10 net 30
Firms generally choose to finance temporary assets with short term debt because matching the maturities of assets and liabilities reduces risk
Ranking conflicts between the NPV and IRR methods are caused by differing all of the above
WOTF sources of funds is generally considered to be most expensive to the firm new common stock
Character refers to the willingness of the applicant to meet its financial obligations
The importance of a letter of credit in international trade is that the bank issuing the credit all of the above
The primary goal of accounts receivable management should be maximizing shareholder wealth
WOTF is false Changes in firms collection policy can affect sales and working capital
WOTF statements concerning commercial paper is false commercial paper can be issued by any firm so long as it is willing to pay rate of interest
According to residual theory of dividends dividends are a residual after financing needs have been met
Most investment banking firms do business in the all of the above
WOTF would not be expected to result in a dilution of stock price stock repurchase
WOTF is not a typical attribute of an operating lease lease period equals the economic life of an asset
The objective of offering a cash discount is to reduce the firms level of receivables investment
The transactions that george has just participated in is a margin purchase
WOTF factors does not influence a firms financial structure lifo versus fifo
WOTF would not be acceptable as collateral for a loan by most lenders all of the above are accepted as collateral
The largest single category of short term credit is trade credit
The stock of most companies is traded in the over the counter market
A portion of a firms current assets fluctuate over time the cyclical and seasonal nature of the firms business
If the inflation rate in england is higher than US, the british pound should depreciate against the US dollar
WOTF is not a function served by investment bankers assume the risk of dividend payments by guaranteeing them to investors
Leases can be operating leases or financial leases lessee is allowed to deduct depreciation of the asset
WOTF statements about the valuation of the company as a whole uses WACC is not true all of the above are true
A firm needs to generate cash establish a lockbox system
If the inflation rate in switzerland is higher than US, the swiss franc would depreciate against the dollar
WOTF terms of credit has the lowest effective interest cost 2/10 net 30
WOTF does not influence the average size of the inventory that a firm holds all of the above influence the average size of a firms inventory
WOTF is not true about a stock split it causes a dilution of control
As a consequence of using debt financing the percentage change in net income is greater than the percentage in sales
WOTF is true An increase in the corporate tax rate would lower the weighted average cost
WOTF is not true about NPV of a project It assumes cash flows are reinvested at the IRR
If a large corporation wants to issue new common stock investment banker
Modigliani and miller all of the above
a portion of a firms current assets fluctuate over time. the volatilit is attributable to the cyclical and seasonal nature of the business
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Finance Flashcards

International Finance Chapter 7

Due to ____, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies.a. forward realignment arbitrageb. triangular arbitragec. covered interest arbitraged. locational arbitrage C
Due to ____, market forces should realign the spot rate of a currency among banks.a. forward realignment arbitrageb. triangular arbitragec. covered interest arbitraged. locational arbitrage D
Due to ____, market forces should realign the cross exchange rate between two foreign currencies based on the spot exchange rates of the two currencies against the U.S. dollar.a. forward realignment arbitrageb. triangular arbitragec. covered interest arbitraged. locational arbitrage B
If interest rate parity exists, then ____ is not feasible.a. forward realignment arbitrageb. triangular arbitragec. covered interest arbitraged. locational arbitrage C
In which case will locational arbitrage most likely be feasible?a. One bank’s ask price for a currency is greater than another bank’s bid price for the currencyb. One bank’s bid price for a currency is greater than another bank’s ask price for the currencyc. One bank’s ask price for a currency is less than another bank’s ask price for the currency. d. One bank’s bid price for a currency is less than another bank’s bid price for the currency. B
When using ____, funds are not tied up for any length of time.a. covered interest arbitrageb. locational arbitragec. triangular arbitraged. B and C D
When using ____, funds are typically tied up for a significant period of time.a. covered interest arbitrageb. locational arbitragec. triangular arbitraged. B and C A
Assume that the interest rate in the home country of Currency X is a much higher interest rate than the U.S. interest rate. According to interest rate parity, the forward rate of Currency X:a. should exhibit a discount.b. should exhibit a premium.c. should be zero (i.e., it should equal its spot rate). A
If the interest rate is higher in the U.S. than in the United Kingdom, and if the forward rate of the British pound (in U.S. dollars) is the same as the pound’s spot rate, then:a. U.S. investors could possibly benefit from covered interest arbitrage.b. British investors could possibly benefit from covered interest arbitrage.c. neither U.S. nor British investors could benefit from covered interest arbitrage. d. A and B B
If the interest rate is lower in the U.S. than in the United Kingdom, and if the forward rate of the British pound is the same as its spot rate:a. U.S. investors could possibly benefit from covered interest arbitrage.b. British investors could possibly benefit from covered interest arbitrage.c. neither U.S. nor British investors could benefit from covered interest arbitrage.d. A and B A
Assume that the U.S. investors are benefiting from covered interest arbitrage due to high interest rates on euros. Which of the following forces should result from the act of this covered interest arbitrage?a. downward pressure on the euro’s spot rate.b. downward pressure on the euro’s forward rate.c. downward pressure on the U.S. interest rate.d. upward pressure on the euro’s interest rate. B
Assume that Swiss investors are benefiting from covered interest arbitrage due to a high U.S. interest rate. Which of the following forces results from the act of this covered interest arbitrage?a. upward pressure on the Swiss franc’s spot rate.b. upward pressure on the U.S. interest rate.c. downward pressure on the Swiss interest rate.d. upward pressure on the Swiss franc’s forward rate. D
Assume that a U.S. firm can invest funds for one year in the U.S. at 12% or invest funds in Mexico at 14%. The spot rate of the peso is $.10 while the one-year forward rate of the peso is $.10. If U.S. firms attemptto use covered interest arbitrage, what forces should occur?a. spot rate of peso increases; forward rate of peso decreases.b. spot rate of peso decreases; forward rate of peso increases.c. spot rate of peso decreases; forward rate of peso decreases.d. spot rate of peso increases; forward rate of peso increases. A
Assume the bid rate of a New Zealand dollar is $.33 while the ask rate is $.335 at Bank X. Assume the bid rate of the New Zealand dollar is $.32 while the ask rate is $.325 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?a. $15,385. b. $15,625.c. $22,136. d. $31,250. A
Based on interest rate parity, the larger the degree by which the foreign interest rate exceeds the U.S. interest rate, the:a. larger will be the forward discount of the foreign currency.b. larger will be the forward premium of the foreign currency.c. smaller will be the forward premium of the foreign currency.d. smaller will be the forward discount of the foreign currency. A
Assume the following information:You have $1,000,000 to invest: Current spot rate of pound= $1.3090-day forward rate of pound= $1.28 3-month deposit rate in U.S.= 3% 3-month deposit rate in Great Britain= 4%If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days?a. $1,024,000.b. $1,030,000.c. $1,040,000.d. $1,034,000.e. none of the above A
Assume that the U.S. interest rate is 10%, while the British interest rate is 15%. If interest rate parity exists, then:a. British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the U.S.b. U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the U.S.c. U.S. investors will earn 15% whether they use covered U.S. interest arbitrage or invest in the U.S.d. U.S. investors will earn 10% whether they use covered interest arbitrage or invest in the U.S. D
Assume the following information:U.S. investors have $1,000,000 to invest: 1-year deposit rate offered on U.S. dollars= 12%1-year deposit rate offered on Singapore dollars= 10%1-year forward rate of Singapore dollars= $.412Spot rate of Singapore dollar= $.400Given this information:a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domesticallyb. Interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domesticallyc. interest rate parity exists and covered interest arbitrage above what is possible domestically.d. interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in ayield above what is possible dome B
Assume the following information:Current spot rate of New Zealand dollar= $.41Forecasted spot rate of New Zealand dollar 1 year from now= $.43One-year forward rate of the New Zealand dollar= $.42Annual interest rate on New Zealand dollars = 8% Annual interest rate on U.S. dollars = 9%Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%.a. about 11.97b. about 9.63c. about 11.12d. about 11.64e. about 10.63 E
20. Assume the following bid and ask rates of the pound for two banks as shown below:BidBank A $1.41 Bank B $1.39Ask$1.42 $1.40As locational arbitrage occurs:a. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B willincrease.b. the bid rate for pounds at Bank A will increase; the ask rate for pounds at Bank B willdecrease.c. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B willdecrease.d. the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B will increase. D
21. Assume the bid rate of a Singapore dollar is $.40 while the ask rate is $.41 at Bank X. Assume the bid rate of a Singapore dollar is $.42 while the ask rate is $.425 at Bank Z. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?the bid rate for pounds at Bank A will decrease; the ask rate for pounds at Bank B willincrease.a. $11,764. b. $11,964. c. $36,585. d. $24,390. e. $18,219. D
Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the:a. larger will be the forward discount of the foreign currency.b. larger will be the forward premium of the foreign currency.c. smaller will be the forward premium of the foreign currency.d. smaller will be the forward discount of the foreign currency. B
23. Assume the following exchange rates: $1 = NZ$3, NZ$1 = MXP2, and $1 = MXP5. Given this information, as you and others perform triangular arbitrage, the exchange rate of the New Zealand dollar (NZ) with respect to the U.S. dollar should ____, and the exchange rate of the Mexican peso (MXP) with respect to the U.S. dollar should ____.a. appreciate; depreciateb. depreciate; appreciatec. depreciate; depreciated. appreciate; appreciatee. remain stable; appreciate A
24. Assume the following information:Spot rate today of Swiss franc = $.601-year forward rate as of today for Swiss franc = $.63 Expected spot rate 1 year from now = $.64Rate on 1-year deposits denominated in Swiss francs = 7%Rate on 1-year deposits denominated in U.S. dollars = 9%From the perspective of U.S. investors with $1,000,000, covered interest arbitrage would yield a rate of return of ____%.a. 5.00b. 12.35c. 15.50 d. 14.13 e. 11.22 B
Assume the following information for a bank quoting on spot exchange rates:Exchange rate of Singapore dollar in U.S. $ = $.32 Exchange rate of pound in U.S. $ = $1.50Exchange rate of pound in Singapore dollars = S$4.50Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?a. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S.dollars should appreciate, and the pound value in Singapore dollars should depreciate.b. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S.dollars should appreciate, and the pound value in Singapore dollars should depreciate.c. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S.dollars should appreciate, and the pound value in Singapore dollars should appreciate.d.The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S.dollars should depreciate, and the pound value in Singapore dollars should appreciate. D
26. Assume the British pound is worth $1.60, and the Canadian dollar is worth $.80. What is the value of the Canadian dollar in pounds?a. 2.0.b. 2.40.c. .80.d. .50.e. none of the above D
27. Assume that the euro’s interest rates are higher than U.S. interest rates, and that interest rate parity exists. Which of the following is true?a. Americans using covered interest arbitrage earn the same rate of return as Germans whoattempt covered interest arbitrage.b. Americans who invest in the U.S. earn the same rate of return as Germans who attemptThe Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S.dollars should depreciate, and the pound value in Singapore dollars should appreciate.covered interest arbitrage.c. Americans who invest in the U.S. earn the same rate of return as Germans who invest inGermanyd. AandBe. None of the above E
28. Assume the U.S. interest rate is 2% higher than the Swiss rate, and the forward rate of the Swiss franc has a 4% premium. Given this information:a. Swiss investors who attempt covered interest arbitrage earn the same rate of return as ifthey invested in Switzerland. b. U.S. investors who attempt covered interest arbitrage earn a higher rate of return than if they invested in the U.S.c. A and Bd. none of the above B
Assume that British interest rates are higher than U.S. rates, and that the spot rate equals the forward rate. Covered interest arbitrage puts ____ pressure on the pound’s spot rate, and ____ pressure on the pound’s forward rate.a. downward; downwardb. downward; upwardc. upward; downwardd. upward; upward C
Assume that interest rate parity holds, and the euro’s interest rate is 9% while the U.S. interest rate is 12%. Then the euro’s interest rate increases to 11% while the U.S. interest rate remains the same. As a result of the increase in the interest rate on euros, the euro’s forward ____ will ____ in order to maintain interest rate parity.a. discount; increaseb. discount; decreasec. premium; increased. premium; decrease D
Assume the bid rate of a Swiss franc is $.57 while the ask rate is $.579 at Bank X. Assume the bid rate of the Swiss franc is $.560 while the ask rate is $.566 at Bank Y. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?a. $7,067. b. $8,556. c. $10,114. d. $12,238. A
Assume the following information: You have $1,000,000 to invest: Current spot rate of pound = $1.60 90-day forward rate of pound = $1.57 3-month deposit rate in U.S. = 3% 3-month deposit rate in U.K. = 4% If you use covered interest arbitrage for a 90-day investment, what will be the amount of U.S. dollars you will have after 90 days? a. $1,020,500. b. $1,045,600. c. $1,073,330. d. $1,094,230. e. $1,116,250. A
33. Assume the following information: U.S. investors have $1,000,000 to invest: 1-year deposit rate offered by U.S. banks = 12% 1-year deposit rate offered on Swiss francs = 10% 1-year forward rate of Swiss francs = $.62 Spot rate of Swiss franc = $.60 Given this information: a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically. b. interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. c. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically. d. interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically. B
34. Assume the following information: Current spot rate of Australian dollar = $.64 Forecasted spot rate of Australian dollar 1 year from now = $.59 1-year forward rate of Australian dollar = $.62 Annual interest rate for Australian dollar deposit = 9% Annual interest rate in the U.S. = 6% Given the information in this question, the return from covered interest arbitrage by U.S. investors with $500,000 to invest is ____%. a. about 6.00 b. about 9.00 c. about 7.33 d. about 8.14 e. about 5.59 E
35. Assume the following bid and ask rates of the pound for two banks as shown below: Bid Ask Bank C $1.61 $1.63Bank D $1.58 $1.60As locational arbitrage occurs:a. the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D willincrease.b. the bid rate for pounds at Bank C will increase; the ask rate for pounds at Bank D willdecrease.c. the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D willdecrease.d. the bid rate for pounds at Bank C will decrease; the ask rate for pounds at Bank D willincrease. D
36. Assume the bid rate of an Australian dollar is $.60 while the ask rate is $.61 at Bank Q. Assume the bid rate of an Australian dollar is $.62 while the ask rate is $.625 at Bank V. Given this information, what would be your gain if you use $1,000,000 and execute locational arbitrage? That is, how much will you end up with over and above the $1,000,000 you started with?a. $10,003.b. $12,063.c. $14,441.d. $16,393.e. $18,219. D
37. Assume the following information for a bank quoting on spot exchange rates:Exchange rate of Singapore dollar in U.S. $ = $.60Exchange rate of pound in U.S. $ = $1.50Exchange rate of pound in Singapore dollars = S$2.6Based on the information given, as you and others perform triangular arbitrage, what should logically happen to the spot exchange rates?a. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.b. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should depreciate.c. The Singapore dollar value in U.S. dollars should depreciate, the pound value in U.S. dollars should appreciate, and the pound value in Singapore dollars should appreciate.d. The Singapore dollar value in U.S. dollars should appreciate, the pound value in U.S. dollars should depreciate, and the pound value in Singapore dollars should appreciate. B
38. Bank A quotes a bid rate of $.300 and an ask rate of $.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $.306 and an ask rate of $.310 for the ringgit. What will be the profit for an investor who has $500,000 available to conduct locational arbitrage?a. $2,041,667.b. $9,804.c. $500.d. $1,639. D
39. Which of the following is an example of triangular arbitrage initiation?a. buying a currency at one bank’s ask and selling at another bank’s bid, which is higher than the former bank’s ask.b. buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand (SAR)/Singapore dollar (S$) exchange rate at SAR2.50 when the spot rate for the rand is $.20.c. buying Singapore dollars from a bank (quoted at $.55) that has quoted the South African rand/Singapore dollar exchange rate at SAR3.00 when the spot rate for the rand is $.20.d. converting funds to a foreign currency and investing the funds overseas. C
40. You just received a gift from a friend consisting of 1,000 Thai baht, which you would like to exchange for Australian dollars (A$). You observe that exchange rate quotes for the baht are currently $.023, while quotes for the Australian dollar are $.576. How many Australian dollars should you expect to receive for your baht?a. A$39.93.b. A$25,043.48.c. A$553.00.d. none of the above A
National Bank quotes the following for the British pound and the New Zealand dollar: Quoted Bid Price / Quoted Ask PriceValue of a British pound (£) in $ $1.61 $1.62Value of a New Zealand dollar (NZ$) in $ $.55 $.56Value of a British pound in New Zealand dollars NZ $2.95 NZ$2.96Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?a. $77.64.b. $197.53.c. $15.43.d. $111.80.Quoted Bid Price Quoted Ask Price C
42. Assume the following information:You have $900,000 to invest:Current spot rate of Australian dollar (A$) = $.62180-day forward rate of the Australian dollar = $.64180-day interest rate in the U.S. = 3.5%180-day interest rate in Australia = 3.0%If you conduct covered interest arbitrage, what is the dollar profit you will have realized after 180 days?a. $56,903.b. $61,548.c. $27,000.d. $31,500. A
Assume the following information:You have $400,000 to invest:Current spot rate of Sudanese dinar (SDD) = $.0057090-day forward rate of the dinar = $.0056990-day interest rate in the U.S. = 4.0%90-day interest rate in Sudan = 4.2%If you conduct covered interest arbitrage, what amount will you have after 90 days?a. $416,000.00.b. $416,800.00.c. $424,242.86.d. $416,068.77.e. none of the above D
Exhibit 7-1Assume the following information:You have $300,000 to invest:The spot bid rate for the euro (€) is $1.08The spot ask quote for the euro is $1.10The 180-day forward rate (bid) of the euro is $1.08The 180-day forward rate (ask) of the euro is $1.10The 180-day interest rate in the U.S. is 6%The 180-day interest rate in Europe is 8%44. Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what amount will you have after 180 days?a. $318,109.10.b. $330,000.00.c. $312,218.20.d. $323,888.90.e. none of the above A
45. Refer to Exhibit 7-1. If you conduct covered interest arbitrage, what is your percentage return after 180days? Is covered interest arbitrage feasible in this situation?a. 7.96%; feasibleb. 6.04%; feasiblec. 6.04%; not feasibled. 4.07%; not feasiblee. 10.00%; feasible B
46. According to interest rate parity (IRP):a. the forward rate differs from the spot rate by a sufficient amount to offset the inflation differential between two currencies.b. the future spot rate differs from the current spot rate by a sufficient amount to offset the interest rate differential between two currencies.c. the future spot rate differs from the current spot rate by a sufficient amount to offset the inflation differential between two currencies.d. the forward rate differs from the spot rate by a sufficient amount to offset the interest rate differential between two currencies. D
47. Assume that interest rate parity holds. The Mexican interest rate is 50%, and the U.S. interest rate is 8%. Subsequently, the U.S. interest rate decreases to 7%. According to interest rate parity, the peso’s forward ____ will ____.a. premium; increaseb. discount; decreasec. discount; increased. premium; decrease C
62. Assume the following information:U.S. investors have $1,000,000 to invest:1-year deposit rate offered by U.S. banks = 10%1-year deposit rate offered on British pounds = 13.5%1-year forward rate of Swiss francs = $1.26Spot rate of Swiss franc = $1.30Given this information:a. interest rate parity exists and covered interest arbitrage by U.S. investors results in the same yield as investing domestically.b. interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.c. interest rate parity exists and covered interest arbitrage by U.S. investors results in a yield above what is possible domestically.d. interest rate parity doesn’t exist and covered interest arbitrage by U.S. investors results in a yield below what is possible domestically. A
63. If quoted exchange rates are the same across different locations, then ____ is not feasible.a. triangular arbitrageb. covered interest arbitragec. locational arbitraged. A and C D
64. Points above the IRP line represent situations where:a. covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically.b. covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically.c. covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets.d. covered interest arbitrage is not feasible for neither domestic nor foreign investors. C
65. Points below the IRP line represent situations where:a. covered interest arbitrage is feasible from the perspective of domestic investors and results in the same yield as investing domestically.b. covered interest arbitrage is feasible from the perspective of domestic investors and results in a yield above what is possible domestically.c. covered interest arbitrage is feasible from the perspective of foreign investors and results in a yield above what is possible in their local markets.d. covered interest arbitrage is not feasible for neither domestic nor foreign investors. B
66. Which of the following might discourage covered interest arbitrage even if interest rate parity does not exist?a. transaction costs.b. political risk.c. differential tax laws.d. all of the above. D
67. Assume that interest rate parity holds. U.S. interest rate is 13% and British interest rate is 10%. The forward rate on British pounds exhibits a ____ of ____ percent.a. discount; 2.73b. premium; 2.73c. discount; 3.65d. premium; 3.65 B
68. Assume the following information:Exchange rate of Japanese yen in U.S. $ = $.011Exchange rate of euro in U.S. $ = $1.40Exchange rate of euro in Japanese yen = 140 yenWhat will be the yield for an investor who has $1,000,000 available to conduct triangular arbitrage?a. $100,000b. -$90,909c. 10%d. -9.09% C
69. Assume the following information:Value of an Australian dollar (A$) in $ $0.67 $0.69Value of Mexican peso in $ $.074 $.077Value of an Australian dollar in Mexican pesos 8.2 8.5Assume you have $100,000 to conduct triangular arbitrage. What will be your profit from implementing this strategy?a. $6,133b. $2,368c. $6,518d. $13,711 B
88. Which of the following is not mentioned in the text as a form of international arbitrage?a. Locational arbitrageb. Triangular arbitragec. Transactional arbitraged. Covered interest arbitragee. All of the above are mentioned in the text as forms of international arbitrage. C
89. Bank A quotes a bid rate of $0.300 and an ask rate of $0.305 for the Malaysian ringgit (MYR). Bank B quotes a bid rate of $0.306 and an ask rate of $0.310 for the ringgit. What will be the profit for an investor that has $500,000 available to conduct locational arbitrage?a. $2,041,667b. $9,804c. $500d. $1,639 D
90. American Bank quotes a bid rate of $0.026 and an ask rate of $0.028 for the Indian rupee (INR); National Bank quotes a bid rate of $0.024 and an ask rate for $0.025. Locational arbitrage would involve:a. buying rupees from American Bank at the bid rate and selling them to National Bank at the ask rate.b. buying rupees from National Bank at the ask rate and selling them to American Bank at the bid rate.c. buying rupees from American Bank at the ask rate and selling to National Bank at the bid rate.d. buying rupees from National Bank at the bid rate and selling them to American Bank at the ask rate.e. Locational arbitrage is not possible in this case. B
91. Assume you discovered an opportunity for locational arbitrage involving two banks and have taken advantage of it. Because of your and other arbitrageurs’ actions, the following adjustments must take place.a. One bank’s ask price will rise and the other bank’s bid price will fall.b. One bank’s ask price will fall and the other bank’s bid price will rise.c. One bank’s bid/ask spread will widen and the other bank’s bid/ask spread will fall.d. A and C D
92. Which of the following is an example of triangular arbitrage initiation?a. Buying a currency at one bank’s ask and selling at another bank’s bid, which is higher than the former bank’s ask.b. Buying Singapore dollars from a bank (quoted at $0.55) that has quoted the South African rand (ZAR)/Singapore dollar (S$) exchange rate at ZAR2.50 when the spot rate for the South African rand is $0.20.c. Buying Singapore dollars from a bank (quoted at $0.55) that has quoted the South African rand/Singapore dollar exchange rate at ZAR3.00 when the spot rate for the South African rand is $0.20.d. Converting funds to a foreign currency and investing the funds overseas. C
93. Hewitt Bank quotes a value for the Japanese yen (¥) of $0.007, and a value for the Canadian Dollar (C$) of $0.821. The cross exchange rate quoted by the bank for the Canadian dollar is ¥118.00. You have $5,000 to conduct triangular arbitrage. How much will you end up with if you conduct triangular arbitrage?a. $6,053.27b. $5,030.45c. $6,090.13d. Triangular arbitrage is not possible in this case. B
94. National Bank quotes the following for the British pound and the New Zealand dollar:Quoted Bid Price/ Quoted Ask PriceValue of a British pound (£) in $ $1.61 $1.62Value of a New Zealand dollar (NZ$) in $ $0.55 $0.56Value of a British pound in New Zealand dollars NZ$2.95 NZ$2.96Assume you have $10,000 to conduct triangular arbitrage. What is your profit from implementing this strategy?a. $77.64b. $197.53c. $15.43d. $111.80 C
95. Which of the following is not true regarding covered interest arbitrage?a. Covered interest arbitrage tends to force a relationship between the interest rates of two countries and their forward exchange rate premium or discount.b. Covered interest arbitrage involves investing in a foreign country and covering against exchange rate risk.c. Covered interest arbitrage opportunities only exist when the foreign interest rate is higher than the interest rate in the home country. C
96. Which of the following is not true regarding covered interest arbitrage?a. Covered interest arbitrage is a reason for observing interest rate parity (IRP).b. If the forward rate is equal to the spot rate, conducting covered interest arbitrage will yield a return that is exactly equal to the interest rate in the foreign country.c. When interest rate parity holds, covered interest arbitrage is not possible.d. When interest rate disparity exists, covered interest arbitrage may not be profitable.e. All of the above are true. E
97. Which of the following is not true regarding interest rate parity (IRP)?a. When interest rate parity holds, covered interest arbitrage is not possible.b. When the interest rate in the foreign country is higher than that in the home country, the forward rate of that country’s currency should exhibit a discount.c. When the interest rate in the foreign country is lower than that in the home country, the forward rate of that country’s currency should exhibit a premium.d. When covered interest arbitrage is not feasible, interest rate parity must hold.e. All of the above are true. D
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Finance Flashcards

Finance Test 1

the person responsible for overseeing the cash and credit functions financial planning and captial expenditures is the treasurer
the mixture of debt and equity used by a firm to finance its operations is called capital structure
the management of a firms short term assets and liabilties is called working capital management
a business created a distinct legal entity composed of one or more individuals or entities is called corporation
a business entity operated and taxed like a partnership but with limited liability for the owners is called a limited liability company
the primary goal of financial management is to maximize the current value per share of the existing stock
a conflict of interest between the stockholders and management of a firm is called the agency problem
the sarbanes oxeley act of 2002 is intended to protect investors from corporate abuses
which of the following is a capital budgeting decision deciding whether or not to open a new store
which of the following statements concerning a sole proprietorship is correct? may be forced to sell his/her personal assets to pay company debts
a general partner has more management responsibility than a limited partner
which one of the following statements is correct concerning corporations the largest firms are usually corporations
which one of the following business types is best suited to raising large amounts of capital corporations
the decisions made by financial managers should all be ones which increase the market value of the existing owner’s equity
which form of business structure faces the greatest agency problems corporations
financial markets are composed of capital markets and money markets
the primary market is defined as the market for new issues
the NYSE and NASDAQ are both secondary markets
in a limited partnership each limited partners liability is limited to the amount he put into the partnership
accounting profits and cash flows are generally not the same since GAAP allows for revenue recognition separate from the receipt of cash flows
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Finance Flashcards

Finance 300

Securities and Exchange Commission (SEC) Federal regulatory body governing the sale and listing of securities.
Stockholders Annual Report must include: Income statement, balance sheet, statement of retained earnings, & statement of cash flows
Current asset Short term assets, expected to be converted into ash within a year or less
Gross Profit The amount of profits remaining to satisfy operating, financial, and tax costs.
Sales Revenue- COGS Gross Profit
Statement of Cash Flows Provides a summary of the firm’s operating, investment, and financing cash flows and reconciles them with changes in its cash and marketable securities during the period.
Cross-sectional Analysis Involves the compassion of different firms financial ratios at the same point in time; involves comparing the firms ratio to those of other firms in its industry or to industry averages.
Time Series Analysis Evaluation of the firm’s financial performance over time using financial ratio analysis
Average Collection Period The amount of time needed to collect accounts receivable. Useful in evaluating credit and collection policies
Debt Ratio Measures the proportion of total assets financed by the firm’s creditors
Common size income statement Income statement in which each item is expressed as a percentage of sales (divided by sales)
Price Per Earnings Ratio Measures the amount that investors are willing to pay for each dollar of a firm’s earnings, the higher the P/E ratio, the greater the investors confidence
Modified Accelerated Cost Recovery System (MARCS) System used to determine the depreciation of assets for TAX purposes.
Financial managers Want to depreciate an asset now rather than later
Operating Cash Flows (OCF) Cash a firm generates through its normal operation – producing or selling its outputs of goods or services; calculated as net operating profit after tax (NOPAT) plus depreciation
Operating flows Cash flows DIRECTLY related to sale and production of the firm’s products and services
Investment flows Cash flows associated with purchase and sale of both fixed assets and equity investments in the other firms
Financing flows Cash flow that results from debt and equity financing transactions; include incurrence and repayment of debt, cash inflow from the sale of stock, and cash outflows to purchase sock or to pay cash dividends.
Long term (Strategic) Financial Planning Plans that lay out a company’s planned financial actions and the anticipated impact of those actions over periods ranging from 2-10 years
Key input of short term (operating) financial planning The sales forecast which is what it begins with and various forms of operating and financial data
Final sales forecast A function of providing sales expectations, and the external data provide a means of adjusting these expectations to take into account the general economic factors
% of sales method Method for developing the pro forma income statement; it forecasts sales and then expresses the various income statement items as a percent of projected sales.
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Finance Flashcards

Finance T/F

“Capital” is sometimes defined as funds supplied to a firm by investors. T/F T
The cost of capital used in capital budgeting should reflect the average cost of the various sources of investor-supplied funds a firm uses to acquire assets. T/F T
Suppose you are the president of a small, publicly-traded corporation. Since you believe that your firm’s stock price is temporarily depressed, all additional capital funds required during the current year will be raised using debt. In this case, the appropriate marginal cost of capital budgeting during the current year is the after-tax cost of debt. T/F F
The component costs of capital are market-determined variables in the sense that they are based on investors’ required returns. T/F T
The before-tax cost of debt, which is lower than the after-tax cost, is used as the component cost of debt for purposes of developing the firm’s WACC. T/F F
The cost of debt is equal to one minus the marginal tax rate multiplied by the average coupon rate on all outstanding debt. T/F F
The cost of debt is equal to one minus the marginal tax rate multiplied by the interest rate on new debt. T/F T
The cost of preferred stock to a firm must be adjusted to an after-tax figure because 70% of dividends received by a corporation may be excluded from the receiving corporation’s taxable income. T/F F
The cost of perpetual preferred stock is found as the preferred’s annual dividend divided by the market price of the preferred stock. No adjustment is needed for taxes because preferred dividends, unlike interest on debt, are not deductible by the issuing firm. T/F T
The cost of common equity obtained by retained earnings is the rate of return the marginal stockholder requires on the firm’s common stock. T/F T
For capital budgeting and cost of capital purposes, the firm should always consider retained earnings as the first source of capital (i.e., use these funds first) because retained earnings have no cost to the firm. T/F F
Funds acquired by the firm through retained earnings have no cost because there are no dividend or interest payments associated with them, and no floatation costs are required to raise them, but capital raised by selling new stock or bonds does. T/F F
The cost of equity raised by retained earnings can be less than, equal to, or greater than the cost of external equity raised by selling new issues of common stock, depending on tax rates, floatation costs, the attitude of investors, and other factors. T/F F
The firm’s cost of external equity raised by issuing new stock is the same as the required rate of return on the firm’s outstanding common stock. T/F F
For capital budgeting and cost of capital purposes, the firm should assume that each dollar of capital is obtained in accordance with its target capital structure, which for many firms means partly as debt, partly as preferred stock, and partly retained earnings. T/F T
The higher the firm’s floatation cost for new common equity, the more likely the firm is to use preferred stock, which has no floatation cost, and retained earnings, whose cost is the average return on the assets that are acquired. T/F F
A firm should never accept a project if its acceptance would lead to an increase in the firm’s cost of capital (its WACC). T/F F
Because “present value” refers to the value of cash flows that occur at different points in time, a series of present values of cash flows should not be summed to determine the value of a capital budgeting project. T/F F
Assuming that their NPVs based on the firm’s cost of capital are equal, the NPV of a project whose cash flows accrue relatively rapidly will be more sensitive to changes in the discount rate than the NPV of a project whose cash flows come in later in its life. T/F F
A basic rule in capital budgeting is that if a project’s NPV exceeds its IRR, then the project should be accepted. T/F F
Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method puts the other one first. In theory, such conflicts should be resolved in favor of the project with the higher NPV. T/F T
Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method puts the other one first. In theory, such conflicts should be resolved in favor of the project with the higher IRR. T/F F
The internal rate of return is that discount rate that equates the present value of the cash outflows (or costs) with the present value of the cash inflows. T/F T
Other things held constant, an increase in the cost of capital will result in a decrease in a project’s IRR. T/F F
Under certain conditions, a project may have more than one IRR. One such condition is when, in addition to the initial investment at time = 0, a negative cash flow (or cost) occurs at the end of the project’s life. T/F T
The phenomenon called “multiple internal rates of return” arises when two or more mutually exclusive projects that have different lives are being compared. T/F F
The NPV method is based on the assumption that projects’ cash flows are reinvested at the project’s risk-adjusted cost of capital. T/F T
The IRR method is based on the assumption that projects’ cash flows are reinvested at the project’s risk-adjusted cost of capital. T/F F
The NPV method’s assumption that cash inflows are reinvested at the cost of capital is generally more reasonable than the IRR’s assumption that cash flows are reinvested at the IRR. This is an important reason why the NPV method is generally preferred over the IRR method. T/F T
For a project with one initial cash outflow followed by a series of positive cash inflows, the modified IRR (MIRR) method involves compounding the cash inflows out to the end of the project’s life, summing those compounded cash flows to form a terminal value (TV), and then finding the discount rate that causes the PV of the TV to equal the project’s cost. T/F T
Both the regular and the modified IRR (MIRR) methods have wide appeal to professors, but most business executives prefer the NPV method to either of the IRR methods. T/F F
When evaluating mutually exclusive projects, the modified IRR (MIRR) always leads to the same capital budgeting decisions as the NPV method, regardless of the relative lives or sizes of the projects being evaluated. T/F F
One advantage of the payback method for evaluating potential investments is that it provides information about a project’s liquidity and risk. T/F T
Because of improvements in forecasting techniques, estimating the cash flows associated with a project has become the easiest step in the capital budgeting process. T/F F
Estimating project cash flows is generally the most important, but also the most difficult, step in the capital budgeting process. Methodology, such as the use of NPV versus IRR, is important, but less so than obtaining a reasonably accurate estimate of projects’ cash flows. T/F T
Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate, projects’ initial outlays and subsequent costs can be forecasted with great accuracy. This is especially true for large product development projects. T/F F
Since the focus of capital budgeting is on cash flows rather than on net income, changes in noncash balance sheet accounts such as inventory are not included in a capital budgeting analysis. T/F F
If an investment project would make use of land which the firm currently owns, the project should be charged with the opportunity cost of the land. T/F T
If debt is to be used to finance a project, then when cash flows for a project are estimated, interest payments should be included in the analysis. T/F F
Any cash flows that can be classified as incremental to a particular project—i.e., results directly from the decision to undertake the project—should be reflected in the capital budgeting analysis. T/F T
We can identify the cash costs and cash inflows to a company that will result from a project. These could be called “direct inflows and outflows,” and the net difference is the direct net cash flow. If there are other costs and benefits that do not flow from or to the firm, but to other parties, these are called externalities, and they need not be considered as a part of the capital budgeting analysis. T/F F
In cash flow estimation, the existence of externalities should be taken into account if those externalities have any effects on the firm’s long-run cash flows. T/F T
Suppose a firm’s CFO thinks that an externality is present in a project, but that it cannot be quantified with any precision—estimates of its effect would really just be guesses. In this case, the externality should be ignored—i.e., not considered at all—because if it were considered it would make the analysis appear more precise than it really is. T/F F
Changes in net operating working capital should not be reflected in a capital budgeting cash flow analysis because capital budgeting relates to fixed assets, not working capital. T/F F
The primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the total amount of depreciation that can be taken, assuming the asset is used for its full tax life, is greater. T/F F
The primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the present value of the tax savings provided by depreciation will be higher, other things held constant. T/F T
Typically, a project will have a higher NPV if the firm uses accelerated rather than straight-line depreciation. This is because the total cash flows over the project’s life will be higher if accelerated depreciation is used, other things held constant. T/F F
A firm that bases its capital budgeting decisions on either NPV or IRR will be more likely to accept a given project if it uses accelerated depreciation than if it uses straight-line depreciation, other things being equal. T/F T
Accelerated depreciation has an advantage for profitable firms in that it moves some cash flows forward, thus increasing their present value. On the other hand, using accelerated depreciation generally lowers the reported current year’s profits because of the higher depreciation expenses. However, the reported profits problem can be solved by using different depreciation methods for tax and stockholder reporting purposes. T/F T
If a firm’s projects differ in risk, then one way of handling this problem is to evaluate each project with the appropriate risk-adjusted discount rate. T/F T
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Finance Flashcards

Corporate Finance Reporting Quiz Questions

What are two ways to write the accounting equation? Assets = Liabilities + Owners Equity or Assets – Liabilities = Owners Equity
Sales for the year = $82,229, Net Income for the year= 8,186, and average Assets during the year = $52,445. Return on Assets (ROA) for the year is:A) 63.8%B) 1 0.0%C) 15.6%D) There is not enough information to calculate ROA.E) None of the above Answer: CRationale: ROA = Net Income /Average assets. Therefore ROA equals $8,186 / $52,445 = 15.6%.
In its 2011 annual report, Mattel Inc. reported the following (in millions):Total liabilities $3,061Total shareholders’ equity $2,611What proportion of Mattel is financed by nonowners?A) 54%B) 37%C) 85%D) 46%E) None of the above Answer: A Rationale: Nonowner financing for Mattell’s assets is provided from liabilities (the shareholders are the owners). Assets = Liabilities + Equity. Assets = $3,061 + $2,611 = $5,672. $3,061 / $5,672 = 54%.
Which of the following statements are correct (select all that apply):A) A balance sheet reports on investing and financing activities.B) An income statement reports on financing activities.C) The statement of equity reports on changes in the accounts that make up equity.D) The statement of cash flows reports on cash flows from operating, investing, and financing activities over a period of time.E) A balance sheet reports on a company’s assets and liabilities over a period of time. A, C, D
Which of the following groups would likely not be interested in the financial statements of a large public company such as Berkshire Hathaway?A) ShareholdersB) EmployeesC) CompetitorsD) Taxing agenciesE) None of the above Answer: ERationale: All of these parties would use the financial statements, albeit in different ways and for different purposes.
The Goodyear Tire & Rubber Company’s December 31, 2011, financial statements reported the following (in millions).Cash December 31, 2011 $ 2,772Cash from operating activities 773Cash from investing activities (902)Cash from financing activities 896What did Goodyear report for Cash on its December 31, 2010 balance sheet?A) $2,772 millionB) $3,539 millionC) $767 millionD) $2,005 millionE) None of the above Answer: DRationale: Cash, beginning of year + Cash from operating activities + Cash from investing activities + Cash from financing activities = Cash at end of yearCash, beginning of year + $773 – $902 + $896 = $2,772. Cash, beginning of year = $2,005
True or False? A statement of cash flows reports on cash flows for operating, investing and financing activities at a point in time? Answer: FalseRationale: A statement of cash flows reports on cash flows for operating, investing, and financing activities over a period of time.
True or False? Shareholders demand financial information primarily to assess profitability and risk whereas bankers demand information primarily to assess cash flows to repay loan interest and principal. Answer: TrueRationale: While both shareholders and bankers are interested in all the information companies provide, shareholders care about more about a company’s profitability and bankers care more about solvency and creditworthiness.
For each of the following financial statement items, indicate the correct balance sheet classification, from the list below. You may use each balance sheet classification item only once.Interest payableTreasury stockInsurance expenseGoodwillNote payable, due in 2015Prepaid insurance expenseBalance sheet classification a. Current assetb. Long term assetc. Current liabilityd. Long term liabilitye. Equityf. None of the above Answer: Financial statement item Balance sheet classificationInterest payable c. Current liabilityTreasury stock e. EquityInsurance expense f. None of the aboveGoodwill b. Long term assetNote payable, due in 2015 d. Long term liabilityPrepaid insurance expense wa. Current asset
Assets are recorded in the balance sheet in order of:A) Market ValueB) Historic ValueC) LiquidityD) MaturityE) None of the above C) Liquidity
Liquidity refers to:A) The life cycle of the companyB) The amount of receivables the company has in the balance sheetC) The amount of financial leverageD) None of the above Answer: DRationale: Liquidity refers to cash, the amount on hand, the amount generated from operating activities, and the amount that can be raised on relatively short notice.
The 2011 balance sheet of The Washington Post Company shows average shareholders’ equity of $2,726,277 thousand, net operating profit after tax of $176,109 thousand, net income of $117,157 thousand, and average net operating assets of $2,414,864 thousand. The company’s return on net operating assets (RNOA) for the year is:A) 8.6%B) 4.3%C) 7.3%D) 4.8%E) There is not enough information to calculate the ratio. Answer: CRationale: RNOA = NOPAT / average NOA = $176,109 / $2,414,864 = 7.3%
The 2011 financial statements of The Washington Post Company reveal average common shareholders’ equity of $2,708,130 thousand, net operating profit after tax of $176,109 thousand, net income attributable to The Washington Post Company of $116,233 thousand, and average net operating assets of $ 2,414,864 thousand. The company’s return on equity (ROE) for the year is:A) 8.6%B) 4.8%C) 9.6%D) 4.3%E) There is not enough information to calculate the ratio. Answer: DRationale: ROE = Net income/Average shareholders’ equity = $116,233 / $2,708,130 = 4.3%
True or False? Solvency ratios measure a company’s ability to meet its debt obligations? Answer: TrueRationale: A solvent company is one that can meet its debt obligations including principal and interest payments as they come due.
True or False? All else equal, when investors consider a firm’s return on equity (ROE) they consider less risky a firm that earns proportionately more of that return from operating activities as opposed to non-operating activities? Answer: TrueRationale: Financial leverage will increase nonoperating return and ROE; however this adds risk to the investment. For equal returns, investors typically prefer less risk
True or False? Ratios provide one way to compare companies in the same industry regardless of their size? Answer: TrueRationale: Ratios mitigate problems arising from different sizes of companies.
True or False? Net operating asset turnover (NOAT) measures a company’s profitability? Answer: FalseRationale Net operating asset turnover is a productivity or efficiency concept.
Accrual Accounting Revenues are recorded when earned, and expenses are recorded when they are incurred.
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Finance Flashcards

NC Finance Chap 3

In general, what is changing as you read down the left-hand side of a balance sheet? A. The assets are becoming more fully depreciated.B. The assets are increasing in value.C. The assets are increasing in maturity.D. The assets are becoming less liquid. D. The assets are becoming less liquid.
A balance sheet portrays the value of a firm’s assets and liabilities: A. over an annual period.B. over any stated period of time.C. at any stated point in time.D. only at the end of the calendar year. C. at any stated point in time.
Which of the following items should not be included in a listing of current assets? A. Marketable securitiesB. Accounts payableC. Accounts receivableD. Inventories B. Accounts payable
Which of the following assets is likely to be considered the most liquid? A. Marketable securitiesB. Net fixed assetsC. Accounts payableD. Inventories A. Marketable securities
If the value of a firm’s net fixed assets equals the value of the accumulated depreciation, from an accounting context the fixed assets are: A. new.B. fully depreciated.C. one-half depreciated.D. equal in value to the firm’s current assets. C. one-half depreciated.
If the balance sheet of a firm indicates that total assets exceed current liabilities plus shareholders’ equity, then the firm has: A. no retained earnings.B. long-term debt.C. no accumulated depreciation.D. current assets. B. long-term debt.
Which one of the following is an intangible asset? A. GoodwillB. Retained earningsC. Deferred income taxesD. Treasury stock A. Goodwill
Suppose Dee’s just acquired the assets of Flo’s Flowers. The book value of Flo’s Flowers assets was $68,000 but Dee’s paid a total of $75,000. The additional $7,000 paid by Dee’s will be recorded on Dee’s balance sheet as: A. accounts payable.B. goodwill.C. other current assets.D. property, plant, and equipment. B. goodwill.
What happens to a firm’s net worth as it uses cash to repay accounts payable? A. Net worth increases.B. Net worth decreases.C. Net worth remains constant.D. Net worth decreases temporarily, until cash is replenished. C. Net worth remains constant
If a payment of principal is due in 13 months on a long-term liability, that payment will now appear on the balance sheet as: A. a current liability.B. long-term debt.C. cash.D. interest expense. B. long-term debt.
Net working capital is a measure of a company’s: A. goodwill.B. short-term liabilities.C. estimated cash reservoir.D. shareholders’ equity. C. estimated cash reservoir.
Net working capital is calculated by taking the difference between: A. total assets and total liabilities.B. inventory and accounts payable.C. current assets and current liabilities.D. cash and accounts payable. C. current assets and current liabilities.
Which of the following statements about net working capital (NWC) is correct? A. NWC is positive for all firms.B. As NWC decreases, potential liquidity increases.C. NWC excludes inventory, which is deemed illiquid.D. Decreases in NWC can increase the firm’s risk. D. Decreases in NWC can increase the firm’s risk.
The existence of goodwill on a corporate balance sheet indicates that the corporation has: A. been profitable in the past.B. depreciated its tangible assets.C. intangible assets from past acquisitions.D. retained earnings resulting from past income. C. intangible assets from past acquisitions.
A balance sheet may be considered backward-looking from the perspective that it: A. works backward, starting with net income.B. records historic, not current values.C. cannot forecast the future.D. records costs over many previous periods. B. records historic, not current values.
According to GAAP, assets and liabilities are typically recorded on the balance sheet at: A. historical cost plus depreciation.B. market value.C. salvage value.D. historical cost less depreciation. D. historical cost less depreciation.
Which of the following is correct for a fully depreciated asset? A. Market value is zero.B. Market value is greater than book value.C. Book value is greater than market value.D. The relationship between market and book values is indeterminable. D. The relationship between market and book values is indeterminable.
Depreciation expense is used to: A. allocate costs to all departments of the firm.B. determine when an asset is fully paid off.C. allocate historical cost over the life of an asset.D. equate the historical cost and market values of an asset. C. allocate historical cost over the life of an asset.
When subtracting an asset’s accumulated depreciation from its historic cost, the resulting value is termed the: A. book value of the asset.B. market value of the asset.C. depreciation expense.D. current asset value. A. book value of the asset.
ABC Corp.’s balance sheet shows its long-term debt to be $20 million. The debt was issued with a 10% interest rate, and the current interest rate is 7%. Based on this information alone, the market value of this debt is most likely: A. less than $20 million.B. more than $20 million.C. equal to $20 million.D. unknown without knowing the maturity of the debt. B. more than $20 million.
Which of the following statements about depreciation is correct? A. Depreciation is subtracted from cost of goods sold to calculate net income.B. When depreciation expense is incurred, cash balances are reduced.C. Depreciation expense does not affect net income.D. Depreciation reduces the book value of assets. D. Depreciation reduces the book value of assets.
If market interest rates have increased since a company last borrowed long-term funds, the market value of these long-term funds will likely be: A. greater than their book value.B. less than their book value.C. equal to their book value.D. unknown without knowing the maturity of the debt. B. less than their book value.
Which of the following values would most likely interest a shareholder? A. Book value of equityB. Market value of equityC. Retained earningsD. Net working capital B. Market value of equity
What happens to the market value of a firm’s equity as the book value of the firm’s equity increases? A. It increases by the same amount.B. It decreases by the same amount.C. It remains constant.D. There is no set relationship to determine this outcome. D. There is no set relationship to determine this outcome.
Which of the following statements is true for a corporation with $1 million market value of equity, $2 million market value of assets, and 1,000 shares of outstanding stock? A. Market value of liabilities exceeds book value of liabilities.B. Market value of liabilities equals $1 million.C. Book value per share equals $1,000.D. Market value per share equals $2,000. B. Market value of liabilities equals $1 million.
Which of the following is more likely to be correct if market value of equity is less than book value of equity? A. Investors anticipate excellent earning potential.B. Investors anticipate low earning potential.C. Assets have been fully depreciated.D. The company is bankrupt. B. Investors anticipate low earning potential.
Market-value balance sheets differ from book-value balance sheets in that market values: A. are higher than book values.B. are lower than book values.C. conform more to GAAP accounting.D. conform to investors’ expectations. D. conform to investors’ expectations.
If market values of equity exceed book values of equity, then: A. equity has been depreciated too rapidly.B. the firm uses accrual-based accounting.C. profit potential is expected to be attractive.D. the firm is holding too much cash. C. profit potential is expected to be attractive.
Perhaps the best method for estimating the market value of shareholders’ equity is to: A. review the firm’s balance sheet.B. review the firm’s income statement.C. multiply number of shares outstanding by the price of each share.D. add the retained earnings to the total liabilities. C. multiply number of shares outstanding by the price of each share.
In which of the following asset accounts are you least likely to find a difference between market value and book value? A. CashB. InventoryC. LandD. Shareholders’ equity A. Cash
Amy wants to know if inventory is increasing as a percentage of total assets. Which one of these statements most easily provides the information she is seeking? A. Statement of cash flowsB. Balance sheetC. Common-size balance sheetD. Income statement C. Common-size balance sheet
Which one of the following expense categories is subtracted from total revenues to help arrive at a firm’s EBIT? A. Cash dividendsB. Depreciation expenseC. Interest expenseD. Tax liability B. Depreciation expense
Which one of the following does not reduce a firm’s net income? A. Income taxesB. Interest expenseC. DividendsD. Depreciation expense C. Dividends
Calculate the EBIT for a firm with $4 million total revenues, $3.5 million cost of goods sold, $500,000 depreciation expense, and $120,000 interest expense. A. $500,000B. $380,000C. $0D. ($120,000) C. $0EBIT = $4,000,000 – 3,500,000 – 500,000 = $0
The net income figure on an income statement is calculated before deducting the: A. interest expense.B. depreciation expense.C. cash dividends.D. tax liability. C. cash dividends.
An increase in depreciation expense will (other things equal): A. increase net income.B. decrease net income.C. increase taxable income.D. decrease the market value of assets. B. decrease net income.
Current period depreciation expense is listed: A. on the balance sheet.B. in the investment section of the cash flow statement.C. on the income statement.D. on neither the balance sheet nor the income statement; it is a noncash expense. C. on the income statement.
Retained earnings result from: A. the sale of additional shares of stock to investors.B. income not paid to shareholders.C. an excess of assets over liabilities.D. market values that exceed book values. B. income not paid to shareholders.
The gathering of related revenues and expenses into the same period, regardless of when they were incurred, is: A. cash-basis accounting.B. market-value accounting.C. book-value accounting.D. accrual accounting. D. accrual accounting.
According to accrual accounting, when goods are not sold until the period after they were produced, then the cost of goods sold will be: A. recognized when the goods are produced.B. recognized when the goods are sold.C. recognized when payment is received.D. split between the production and the sale periods. B. recognized when the goods are sold.
Accrual accounting, which attempts to match sales revenues and the expenses associated with the production of the goods, is conducted in an attempt to: A. reduce income-tax liability.B. reduce bias in reported profitability measures.C. speed up the receipt of accounts receivable.D. reduce the time necessary to depreciate assets. B. reduce bias in reported profitability measures.
Which of the firm’s financial statements most clearly recognizes the payment for new equipment? A. Balance sheetB. Income statementC. Statement of cash flowsD. Common-size balance sheet C. Statement of cash flows
If a firm pays taxes, which one of these will reduce net income but increase cash flow? A. Depreciation expenseB. Income taxesC. Cash salesD. Interest expense A. Depreciation expense
Which one of the following best explains the combination of a high level of net income combined with a low level of cash flow during an accounting period? A. High depreciation expenseB. Reduction of inventory levelsC. Acquisition of equipmentD. Increase in accounts payable C. Acquisition of equipment
Assume a firm generates $2,000 in sales and has a $500 increase in accounts receivable during an accounting period. Based solely on this information, cash flow will increase by: A. $2,500.B. $2,000.C. $1,500.D. $500. C. $1,500.
In a statement of cash flows, which category includes depreciation expense as a line item? A. OperationsB. InvestmentsC. FinancingD. None of these; depreciation is a noncash expense. A. Operations
Which of the following will occur in a statement of cash flows as a result of paying cash dividends? A. Cash flows from operations will increase.B. Cash flows from investments will decrease.C. Cash flows from financing will decrease.D. Cash balances will not be affected. C. Cash flows from financing will decrease.
Which of the following changes in working capital will result in an increase in cash flows? A. Increase in accounts payableB. Increase in inventoriesC. Increase in accounts receivableD. Decrease in other current liabilities A. Increase in accounts payable
Which of the following statements is more likely if cash and marketable securities increase by $5,000 during a period in which cash provided by operations increases by $1,000 and cash used by investments decreases by $500? A. Cash provided by financing increases by $6,500.B. Cash used by financing decreases by $1,000.C. Debt increases by more than cash dividends paid.D. Debt is reduced by more than cash dividends paid. C. Debt increases by more than cash dividends paid.Cash provided by financing increased. This could occur by increasing debt by a larger amount than the amount paid out in dividends.
If a firm’s net income is positive and its noncash expenses are positive, which of the following could account for a negative amount of cash provided by operations? A. Current assets decrease more than current liabilities decrease.B. Current assets increase more than current liabilities increase.C. Current assets decrease more than current liabilities increase.D. A large addition is made to plant and equipment. B. Current assets increase more than current liabilities increase.
What is the most likely conclusion for a firm whose statement of cash flows shows an increase in cash balances and has negative cash flows from both operations and financing? A. The firm has low depreciation expense.B. The firm did not pay any dividends.C. The firm sold more equipment than it purchased.D. The firm has a low interest rate on its debt. C. The firm sold more equipment than it purchased.
Johnson’s Nursery has net income of $42,500, depreciation expense of $1,800, interest expense of $900, taxes of $1,600, additions to net working capital of $2,300, and capital expenditures of $11,700. What is the amount of the free cash flow? A. $30,300B. $34,400C. $31,200D. $28,700 C. $31,200Free cash flow = $42,500 + 900 + 1,800 – 2,300 – 11,700 = $31,200
According to the statement of cash flows, cash flows from financing could be positive if: A. the firm repaid more debt than it added.B. the firm added more debt than it repaid.C. interest rates were low on outstanding debt.D. the firm sold portions of its plant and equipment. B. the firm added more debt than it repaid.
Which of the following categories of a statement of cash flows is affected by the payment of interest expense? A. Cash flows from operationsB. Cash flows from noncash expensesC. Cash flows from investmentsD. Cash flows from financing A. Cash flows from operations
Which of the following could account for a firm that has a negative net income, yet has a positive amount of cash provided by operations? A. The net loss was greater than the amount of depreciation expense.B. Inventory increased significantly more than accounts payable.C. Accounts receivable decreased by significantly more than accounts payable.D. The cash balance increased significantly. C. Accounts receivable decreased by significantly more than accounts payable.
If a firm’s statement of cash flows shows that cash was used for investments, which of the following would seem most likely? A. The inventory balance increased.B. Common stock was repurchased.C. New machines were acquired.D. Cash dividends were paid. C. New machines were acquired.
Interest expense appears in the operations section of the statement of cash flows because: A. firms cannot operate without incurring interest expense.B. its payment is not within managerial discretion.C. it is paid to finance a firm’s inventory.D. none of these; interest expense appears in the financing section of the statement of cash flows. B. its payment is not within managerial discretion.
Which one of these would not be paid from free cash flow? A. Cash dividendsB. Repayment of principal on a long-term debtC. Repurchase of outstanding shares of common stockD. New equipment purchase D. New equipment purchase
Which of the following statements correctly compares international accounting standards? A. The standards are becoming less similar over time.B. The standards are typically more lenient in the United States.C. The standards are stricter in the United States in some regards.D. Balance sheets differ, but income statements are similar in all countries. C. The standards are stricter in the United States in some regards.
Which of these statements related to free cash flow is correct? A. Free cash flow must be fully distributed to the firm’s debtors and shareholders.B. Free cash flow must be positive for a firm to acquire new fixed assets.C. All, or part, of free cash flow can be used to increase a firm’s cash reserves.D. When capital expenditures are positive, free cash flow will exceed the cash flow from operations. C. All, or part, of free cash flow can be used to increase a firm’s cash reserves.
What is the fundamental difference between IFRS and GAAP? A. GAAP relies more on general principles but ignores the spirit of those principles.B. GAAP relies more on specific rules and the spirit of the rules.C. GAAP relies more on specific rules but not the spirit of the rules.D. GAAP relies more on general principles as well as the spirit of those rules. C. GAAP relies more on specific rules but not the spirit of the rules.
What is the marginal tax rate for a corporation with $60,000 of taxable income and an average tax rate of 18% if the next-lowest marginal tax rate of 15% covers taxable incomes up to $50,000? A. 15%B. 33%C. 18%D. 25% D. 25%18 × $60,000 = (.15 × $50,000) + (x × ($60,000 – 50,000))$10,800 = $7,500 + $10,000xx = .33, or 33%
Assuming at the $50,000 income level that the corporate tax rate increases from 15 to 25%, which of the following statements is correct for a firm with $75,000 of taxable income? A. Its marginal tax rate is 15%.B. Its average tax rate is 25%.C. Its marginal tax rate is 18.33%.D. Its average tax rate is 18.33%. D. Its average tax rate is 18.33%.Average tax rate: [(.15 x 50,000) + (.25 x (75,000 – 50,000))]/75,000 = 18.33
What is the highest marginal rate at which corporate income is taxed? A. 15%B. 34%C. 35%D. 39% D. 39%
Which of the following cannot be used to reduce taxable corporate income? A. Cash dividendsB. Depreciation expenseC. Interest expenseD. Administrative expenses A. Cash dividends
Assume a firm increases its revenue by $100 while increasing its cost of goods sold by $85. How much additional tax will the firm owe if its marginal tax rate is 25%? A. $3.75B. $7.50C. $13.75D. $25.00 A. $3.75Increase in taxes = .25 × ($100 – 85) = $3.75
According to the U.S. tax code at the beginning of 2014, the highest marginal tax rate for personal taxpayers is: A. 25.0%.B. 28.5%.C. 35.0%.D. 39.6%. D. 39.6%
Which one of the following statements is correct for a corporation with a negative net income in both the present and the last fiscal year? A. This year’s loss can be carried back, but last year’s loss cannot be used.B. Neither of the losses can be used to reduce taxes.C. Both losses can be carried forward but not backward.D. Both losses can be carried forward and backward, within certain time limits. D. Both losses can be carried forward and backward, within certain time limits.
Assume a single taxpayer is taxed at 10% on the first $9,075 of taxable income, 15% on the next $27,825 of income, and at 25% for the following $52,450 of income. What is the average tax rate for that individual if her taxable income is $41,350? A. 14.98%B. 16.67%C. 16.13%D. 19.98% A. 14.98%Average Tax Rate= [(.10 x 9.075) + (.15 x 27,825) + (.25 x 41,350 – 36,900))] / 41,350= 6,193.75 / 41,350= 14.98%
An individual’s income for the year includes both dividend and interest payments. Which of these statements correctly applies to that individual’s tax liability? A. Dividends are taxed; tax on interest payments is paid at the corporate level.B. Interest is taxed; tax on dividend payments is paid at the corporate level.C. Both dividend and interest payments are taxed at the personal level.D. All taxes on dividend and interest payments are paid at the corporate level. C. Both dividend and interest payments are taxed at the personal level.
A major goal of the Sarbanes-Oxley Act is to: A. increase transparency in the financial reporting of a firm’s activities.B. require firms to provide common-size balance sheets to shareholders.C. lower corporate tax rates.D. require U.S. firms to abide by international accounting standards. A. increase transparency in the financial reporting of a firm’s activities.
Which one of the following is not a requirement imposed by the Sarbanes-Oxley Act? A. Accounting firms may not offer other services to companies they audit.B. Any one individual is prohibited from serving as the chairman of a firm’s board of directors for more than 5 years.C. A board’s audit committee must consist of directors who are independent of the firm’s management.D. Management must certify that the financial statements present a fair view of the firm’s financial position. B. Any one individual is prohibited from serving as the chairman of a firm’s board of directors for more than 5 years.
Who pays taxes on earnings distributed as dividends? A. The issuing corporationB. The shareholder receiving the dividendC. Both the issuing corporation and the shareholderD. Neither the issuing corporation nor the shareholder C. Both the issuing corporation and the shareholder
Assume tax rates on single individuals are 10% on taxable income up to $9,075, 15% on income of $9,076 to $36,900 and 25% on income of $36,901 to $89,350. What is the tax liability for a single individual with $52,000 of taxable income, which includes $2,000 of dividends? A. $8,856.25B. $9,103.50C. $8,603.50D. $8,356.25 A. $8,856.25Tax= (.10 x 9,075) + [.15 x (36,900 – 9,075)] + [.25 x (52,000 – 36,900)] = 8,856.25
Which of the following forms of income can individuals defer from taxation? A. DividendsB. InterestC. Realized capital gainsD. Unrealized capital gains D. Unrealized capital gains
Which type of income is subject to “double taxation”? A. Dividends and wagesB. Capital gainsC. DividendsD. Wages C. Dividends
Professor Diehard found an effective antibiotic for the DEPRESS bacteria, and patented the drug. He believes that he can sell the patent for $20 million. He then formed a corporation and invested $400,000 in setting up a production plant. There are 2 million shares of stock outstanding. If the professor’s belief is correct, what would be the price per share and the book value per share? A. $10.20; $.20B. $10.00; $.20C. $9.80; $.40D. $9.80; $.20 A. $10.20; $.20Book value equals the $400,000 Professor Diehard has contributed in tangible assets. Market value equals the value of his patent plus the value of the production plant, or $20.4 million. Price per share = $20.4 million/2 million shares = $10.20. Book value per share = $400,000/2 million shares = $.20.
You have gathered this information on a firm: $500,000 sales, $10,000 cash dividends, $300,000 cost of goods sold, $20,000 administrative expense, $20,000 depreciation expense, $40,000 interest expense, $10,000 purchase of productive equipment, no changes in working capital, and a tax rate of 35%. What is the free cash flow? A. $141,000B. $168,000C. $128,000D. $142,000 C. $128,000Net income = ($500,000 – 300,000 – 20,000 – 20,000 – 40,000) × (1 – .35) = $78,000Cash flow from operations = $78,000 + 40,000 + 20,000 = $138,000Free cash flow = $138,000 – 10,000 = $128,000
What is the overall change in cash resulting from: $300 increase in inventories, $150 increase in accounts payable, $120 decrease in accounts receivable, $60 decrease in other current assets, $150 decrease in other current liabilities? A. -$120B. -$240C. $180D. $120 A. -$120Net change in cash = -$300 + 150 + 120 + 60 – 150 = -$120
What is the change in cash for a firm with the following: $10,000 cash flow from operations, $1,600 cash used for new investment, a reduction in the level of debt of $2,000, $1,000 in cash dividends, and $200 in depreciation expense? A. $5,600B. $9,600C. $9,400D. $5,400 D. $5,400Change in cash = $10,000 – 1,600 – 2,000 – 1,000 = $5,400
What are the average and marginal tax rates for a corporation that has $97,648 of taxable income? The tax rates are as follows: A. 21.97%; 25%B. 21.97%; 34%C. 23.08%; 34%D. 34%; 34% B. 21.97%; 34%Tax= (.15 x 50,000) + [.25 x (75,000 – 50,000)] + [.34 x (97,648 – 75,000)] = 21,450.32Average tax rate = $21,450.32/$97,648 = .2197, or 21.97%Marginal tax rate = 34%
Which one of these will increase a firm’s cash balance? A. An increase in inventoryB. A decrease in accounts payableC. An increase in common stockD. An increase in new equipment C. An increase in common stock
Categories
Finance Flashcards

Banking and Finance

two types of deposit accounts transaction accounts and time deposits
transaction account an account that allows transaction to occur at any time in any number
demand deposits payable on demand whenever depositor chooses
most common form of a transaction account checking account
two types of checking accounts basic checking account and interest bearing account
time deposits deposits that are held for or mature at a specific time
three types of time deposits saving accounts, money market deposit account, certificate of deposit
two types of saving accounts passbook saving accounts and statement saving accounts
money market deposit accounts saving account earning a competitive interest rate from invested deposits
certificate of deposits certificate offered by a bank that guarantees payment of a specified interest until a designated date in the future or maturity date
three types of credit union transaction accounts share draft account (checking account)share account (saving account)share certificate (CD)
interest price paid for the use of money
calculating interest P x R x T = I
adding interest to the principal and paying interest on the new total is called paying compound interest
The Federal Reserve can put more money into the economy by buying US government securities on open market, effectively taking money out of the economy by selling securities, and adjusting discount rate
governing documents deposit accounts documents
five types of deposit accounts documents account rules, deposit rate schedule, fee schedules, check hold policies, disclosure statements
account rules explain characteristics of each type of account
deposit rate schedule list interest rates
fee schedule shows all charges that apply to each type of deposit account
check hold policies explain when deposited funds will be available for use by the consumer
disclosure statements provide full information about bank policies
annual percentage yield effect rate of interest when compounding is factored in
passbook savings account saving account that provides you with a ledger of activity
compound intrest returned calculated by adding interest to principal for next interval
annual percentage rate nominal rate on which interest is calculated per year
three types of demand deposits checking account, traveler’s check, and automatic transfer service
why are saving accounts not subject to the Fed’s reserve requirements? less liquid that checking account
Why are transaction accounts the most liquid of all the funds? they are demand deposits