Categories
Finance Flashcards

finance chapter 7

false The largest category of mortgages by dollar volume is commercial mortgages.
true The process of mortgage securitization results in a separation between mortgage origination and mortgage financing.
true subprime mortgage is a mortgage made to a borrower who has a below normal credit rating.
false Federally insured mortgages are called conventional mortgages.
false Private mortgage insurance (and hence, that part of the homeowner’s monthly payment) is automatically removed from a mortgage when the loan-to-value ratio on the mortgage falls below 80 percent.
true A borrower using a conventional mortgage will have to put up at least a 20 percent down payment or purchase private mortgage insurance.
false Discount points are paid to reduce the down payment required.
true On a fixed-rate mortgage the dollars of interest the homeowner pays falls each year the mortgage is outstanding.
homecommercialmultfarm 9. Rank the following types of mortgages by amount outstanding from largest to smallest.I. Home mortgagesII. Multifamily mortgagesIII. Farm mortgagesIV. Commercial mortgages A. I, II, III, IVB. I, II, IV, IIIC. II, I, IV, IIID. IV, II, III, IE. I, IV, II, III
securitization 10. The process of packaging and/or selling mortgages that are then used to back publicly traded debt securities is called A. collateralization.B. securitization.C. market capitalization.D. stock diversification.E. mortgage globalization.
lien 11. A ___________ placed against mortgaged property ensures that the property cannot be sold (except by the lender) until the mortgage is paid off. A. collateralB. lienC. writ of habeas corpusD. down paymentE. writ of certiorari
none 12. If a borrower makes a 20 percent down payment on a conventional mortgage, she will be required to obtain A. FHA insurance.B. VA insurance.C. private mortgage insurance.D. GNMA payment guarantees.E. none of the options.
higher and less interest 13. Mortgage payments are ____________ on a 15-year fixed-rate mortgage than on a 30-year fixed-rate mortgage, and ____________ is paid on a 15-year mortgage than on a 30-year mortgage; ceteris paribus. A. lower; less interestB. lower; less principalC. higher; less interestD. higher; more principalE. higher; more interest
lender ;borrower With a fixed-rate mortgage, the ____________ bears the interest rate risk and with an ARM the ______________ bears the interest rate risk. A. borrower; lenderB. borrower; borrowerC. lender; lenderD. lender; borrowerE. federal government; pool organizer
amoritization schedule 15. The schedule showing how monthly mortgage payments are split into principal and interest is called a(n) A. securitization schedule.B. balloon payment schedule.C. graduated payment schedule.D. amortization schedule.E. growing equity schedule.
1203.48.80 * $255,000 = Pmt × PVIFA (0.0585/12, 360 months); Pmt = $1,203.48 16. You purchase a $255,000 house and you pay 20 percent down. You obtain a fixed-rate mortgage where the annual interest rate is 5.85 percent and there are 360 monthly payments. What is the monthly payment? A. $1,215.27 B. $1,203.48 C. $1,194.45 D. $1,367.22 E. $1,504.35 0
$265,000 = [Pmt × PVIFA (0.0625/12, 180 months)] + $275 = $2,547 You obtain a $265,000, 15-year fixed-rate mortgage. The annual interest rate is 6.25 percent. In addition to the principal and interest paid, you must pay $275 a month into an escrow account for insurance and taxes. What is the total monthly payment (to the nearest dollar)? A. $2,272 B. $1,632 C. $2,547 D. $1,907 E. $2,311
0.75 * $325,000 = Pmt × PVIFA (0.0575/12, 360 months); Balance after five years = $226,107.8; New Pmt = $226,107.8/PVIFA (0.051/12,300) = $1,335.01 18. You purchase a $325,000 town home and you pay 25 percent down. You obtain a 30-year fixed-rate mortgage with an annual interest rate of 5.75 percent. After five years you refinance the mortgage for 25 years at a 5.1 percent annual interest rate. After you refinance, what is the new monthly payment (to the nearest dollar)? A. $1,422 B. $1,401 C. $1,366 D. $1,335 E. $1,296
$2,250,000 = Pmt × PVIFA (0.072/12, 360 months); Pmt = $15,272.73; New Balance = $15,272.73 × PVIFA (0.072/12, 300 months) = $2,122,425.62 19. A borrower took out a 30-year fixed-rate mortgage of $2,250,000 at a 7.2 percent annual rate. After five years, he wishes to pay off the remaining balance. Interest rates have by then fallen to 7 percent. How much must he pay to retire the mortgage (to the nearest dollar)? A. $2,122,426 B. $2,225,330 C. $2,015,678 D. $2,212,041 E. $1,999,998
0.80 * 245,000 * 1.03 = Pmt × PVIFA (0.05/12, 360 months); Pmt = $1,083.74; Total interest = (360 * 1,083.74) – (0.80 245,000 1,083.74) – (0.80 = Pmt × PVIFA (0.05/12, 360 months); Pmt = $1,083.74; Total interest = (360 * 1,083.74) – (0.80 * 245,000 * 1.03) = $188,265 A homebuyer bought a house for $245,000. The buyer paid 20 percent down but decided to finance closing costs of 3 percent of the mortgage amount. If the borrower took out a 30-year fixed-rate mortgage at a 5 percent annual interest rate, how much interest will the borrower pay over the life of the mortgage? A. $224,655 B. $180,622 C. $228,477 D. $188,265 E. $248,575
$195,000 = Pmt × PVIFA (0.055/12, 180 months); Pmt of $1,593.31 × 180 = $91,796; $195,000 = Pmt × PVIFA (0.061/12, 360 months); Pmt of $1,181.69 × 360 = $230,408; $230,408 – $91,796 = $138,612 21. A homeowner could take out a 15-year mortgage at a 5.5 percent annual rate on a $195,000 mortgage amount, or she could finance the purchase with a 30-year mortgage at a 6.1 percent annual rate. How much total interest over the entire mortgage period could she save by financing her home with the 15-year mortgage (to the nearest dollar)? A. $230,408 B. $190,105 C. $155,612 D. $144,325 E. $138,612
No Points: Pmt = $250,000/PVIFA (0.06/12, 360 months); Pmt = $1,498.88; Pay Points: Pmt = $250,000/PVIFA (0.055/12, 360 months); Pmt = $1,419.47; Pmt savings = $1,498.88 – $1,419.47 = $79.40; NPV of points: [$79.40 × PVIFA (0.055/12, 360 months)] – (0.0225 × $250,000) = $8,360 22. A homeowner can obtain a $250,000, 30-year fixed-rate mortgage at a rate of 6.0 percent with zero points or at a rate of 5.5 percent with 2.25 points. If you will keep the mortgage for 30 years, what is the net present value of paying the points (to the nearest dollar)? A. $9,475 B. $8,360 C. $7,564 D. $7,222 E. $6,578
$5,625 points cost = $79.40 payment savings× PVIFA (0.055/12, N); N = 85.85 months/12 = 7.15 years 23. A homeowner can obtain a $250,000, 30-year fixed-rate mortgage at a rate of 6.0 percent with zero points or at a rate of 5.5 percent with 2.25 points. How long must the owner stay in the house to make it worthwhile to pay the points if the payment saving is invested monthly? A. 7.15 years B. 3.33 years C. 6.04 years D. 5.90 years E. more than 30 years
$5,625 points cost/79.40 payment savings = N = 70.84 months/12 = 5.90 years Refer To: 07-22 24. A homeowner can obtain a $250,000, 30-year fixed-rate mortgage at a rate of 6.0 percent with zero points or at a rate of 5.5 percent with 2.25 points. How long must the owner stay in the house to make it worthwhile to pay the points if the payment saving is not invested? A. 7.15 years B. 3.33 years C. 6.04 years D. 5.90 years E. more than 30 years
mortgage backed bond 25. The least used form of mortgage securitization is the ______________________. A. second mortgageB. mortgage-backed bondC. mortgage pass-throughD. CMOE. home equity loan
$50,000 26. You want to buy a $250,000 house and you will use a conventional mortgage. What is the minimum down payment you have to make to avoid having to purchase mortgage insurance? A. $10,000B. $20,000C. $30,000D. $40,000E. $50,000
.5 percent of the loan amount 27. The FHA charges the homeowner __________________ to insure an FHA mortgage. A. nothingB. 0.5 percent of the loan amountC. $500D. 1 percent of the loan amountE. $1,500
ram 28. A(n) ___________________ is used to help retired people receive monthly income in exchange for the equity in their home. A. SAMB. Equity Participation MortgageC. RAMD. PLAME. GEM
Mortgage companies service more mortgages than they originate.The government is involved in the residential mortgage markets 29. Which of the following statements about mortgage markets is/are true? I. Mortgage companies service more mortgages than they originate. II. Servicing fees typically range from 2 percent to 4 percent. III. Most mortgage sales are with recourse. IV. The government is involved in the residential mortgage markets. A. I, III, and IV onlyB. II, III, and IV onlyC. I, II, and IV onlyD. II and III onlyE. I and IV only
I. GNMA provides timing insurance. III. GNMA insures only FHA, VA, and FMHA loans.IV. GNMA requires that all mortgages in the pool have the same interest rate. 30. Which of the following statements about GNMA is/are true? I. GNMA provides timing insurance. II. GNMA creates pools of mortgages and issues securities. III. GNMA insures only FHA, VA, and FMHA loans. IV. GNMA requires that all mortgages in the pool have the same interest rate. A. I, II, III, and IV are trueB. I, III, and IV onlyC. I, II, and III onlyD. II, III, and IV onlyE. III and IV only
I. the pass-through yield is 103 basis points above the comparable maturity Treasury bond.II. the pass-through is being prepaid more quickly than standard PSA 31. A $25,000 face value GNMA pass-through quote sheet lists a spread to average life of 103, PSA of 220, and a price of 101-09. This means thatI. the pass-through yield is 103 basis points above the comparable maturity Treasury bond.II. the pass-through is being prepaid more quickly than standard PSA.III. the pass-through is priced at $25,272.50. A. I, II, and III are correctB. I and II onlyC. I and III onlyD. II and III onlyE. III only
prepayment penalty 32. Mortgage fees paid by the homeowner at, or prior to, closing upon the purchase of a house typically include all but which one of the following? A. application feeB. title search feeC. title insurance feeD. appraisal feeE. prepayment penalty
I. the MBB does not result in the removal of mortgages from the balance sheet.II. a MBB holder has no prepayment risk.III. cash flows on a MBB are not directly passed through from mortgages. 33. An MBB differs from a CMO or a pass-through in thatI. the MBB does not result in the removal of mortgages from the balance sheet.II. a MBB holder has no prepayment risk.III. cash flows on a MBB are not directly passed through from mortgages. A. I, II, and IIIB. I and II onlyC. II and III onlyD. I and III onlyE. I only
probably has a higher couponwill mature more quickly 34. One fixed-rate mortgage pool has a 750 PSA and a second fixed-rate pool has 150 PSA. The pool with the higher PSA ______________________ than the pool with the lower PSA.I. probably has a higher couponII. probably has lower default riskIII. will mature more quickly A. I, II, and IIIB. I and II onlyC. II and III onlyD. I and III onlyE. I only
none 35. As compared to fixed-rate mortgages, ARMs result in which of the following for the lender?I. Higher interest rate riskII. Lower default riskIII. Greater prepayment penalty fees A. I, II, and IIIB. I and II onlyC. II and III onlyD. I and III onlyE. none of the options
ram 36. Which one of the following types of mortgages is likely to become more popular as the average age of the U.S. population increases? A. GEMB. GPMC. SAMD. PLAE. RAM
gnma 37. Which one of the following entities is an actual government agency dealing with mortgages? A. GNMAB. FNMAC. FHLMCD. PIPE. CMO
Categories
Finance Flashcards

Personal Finance Quiz 6

5 C’s of Credit character, capacity, capital, collateral, conditions
Affinity Card a card issued in conjunction with a specific charity or organization. That group name is on the card and a % of purchases is donated to that group
APR on unpaid balance If you are a credit user, the most important decision factor is this
Average daily balance This method sums the outstanding balances owed each day during the billing period and divides by the number of days in the period
Capacity Out of the five C’s of credit this would be affected by extra use of a credit card. that is, you will begin to start carrying balances from month to month. This category considers your current income level and current borrowing level
Capital This category considers your investment holding or portfolio
Collateral This category considers the amount of assets or property offered as loan security
Credit Bureau A company that gathers and sells consumers’ financial history to creditors
Credit Card Advantages convenience or ease of shopping, emergency use, and it allows for online shopping
Credit Card Denials often these rejections go to a new employee who works solely on commissions
Credit Card Disadvantages They make it easy to lose control of spending, in general they are an expensive way to borrow money, and using them means you will have less spendable money in the future
Credit Card Losses your liability on these losses is limited by law to $50
Credit Cards These are a form of open ended and revolving credit
Credit Report Info information generally found in your credit report includes personal and employment information, personal credit report, and your public financial history
Credit Score Card includes annual income, length of residence, and length of time on current job
Credit Scoring process of mathematically evaluating your creditworthiness to obtain credit
Grace Periods Most banks eliminate this on new purchases if customers don’t pay their balance in full
Merchant’s discount fee The percentage of the credit card sale the retailer owes to the credit card company
Previous balance method uses the balance at the end of the previous billing period
Secured Credit Card this card is useful to someone who has bad credit or no credit established yet
Single-purpose cards example include Shell Oil, Toys R Us, and Sears
T&E Card Features main feature is they do not offer revolving credit and the balance must be paid in full every month
T&E Cards not really a credit charge card. do not offer revolving credit and require full payment of balance each month
Truth in Lending Act requires that all consumer credit agreements disclose the APR in bold print
Categories
Finance Flashcards

VB Personal Finance Paying Your Taxes (Reading Quiz)

QUESTION 1 of 10: The W2 form: b) Is provided to you by your employer, and it lists total income and all tax withheld amounts
QUESTION 2 of 10: Which of the following forms reports interest income earned on a savings account? c) 1099INT
QUESTION 3 of 10: A paycheck has withholding tax taken out: b) That is paid to state and federal taxing authorities
QUESTION 4 of 10: The penalty for not paying taxes owed: b) Includes penalty fees and interest calculated starting April 15 of the year the taxes are owed
QUESTION 5 of 10: A major payroll tax is called: a) FICA, for Federal Insurance Contributions Act
QUESTION 6 of 10: To file your taxes, you need: c) W2 and 1099INT reports, and charitable deduction receipts
QUESTION 7 of 10: A program like Quicken or Money: a) Can help keep track of receipts over a year to make taxes easier to complete
QUESTION 8 of 10: Taxes go to pay for: c) Social Security 21%, National Defense 21%, and net interest 9%
QUESTION 9 of 10: Tax refunds: a) Occur when a taxpayer’s income tax payments, including withholdings, exceed what they owe
QUESTION 10 of 10: The federal government: a) Is the national government of the U.S. that takes in taxes and funds such programs as maintaining interstate highways and the military
Categories
Finance Flashcards

Government Chapter 8

Individuals and organizations can give an unlimited amount of money to Super PACS
When a coalition of credit card companies forms an interest group called the Partnership to Protect ConsumerCredit, this suggests that that private interests are hiding behind the ideals of public interests
In recent years, the religious right has had a great effect on American politics through grassroots mobilization
When membership in an organization allows for a reduction in the price of museum tickets, it is called a material benefit
The free-rider problem occurs because the benefits of a group’s actions are broadly available and cannot be denied tononmembers
Interest groups are concerned with the ________ of government, while political parties are concerned with the________ of government. policies; personnel
Which of the following was eliminated as a result of 2002 campaign finance reforms? soft money
Which of the following issues is part of the agenda of the New Politics movement?
Most initiative campaigns today are sponsored by interest groups seeking to circumvent legislative opposition to their goals.
Members of interest groups in the United States are typically people with higher levels of income and education.
The liberal-leaning MoveOn.org and the conservative-leaning Americans for Prosperity are examples of netroots political association
The collection of grassroots online activist organizations that have redefined membership and fund-raisingpractices and streamlined staff structure are referred to as the pluralists
How the Constitution balances the threat posed by organized interests with the need for liberty is discussed inthe federalists paper no. 10
AARP has approximately ________ members today. 38 million
The Federal Election Campaign Act of 1971
Categories
Finance Flashcards

Finance Test 2

A legal agreement that provdies for the management and control of assets by one party for the benfit of another is known as a trust
Franklin is planning for a purchase of a vehicle in two years. Since he wants to be certain that his funds are safe (insured), which of the following should he use? Savings account
Investments, insurance, and tax assistance are tools for financial planning and are also known as financial services
An all-in-one account that provides a complete financial services program for a single fee is known as asset management account
Brenda lost her debit card. When she realized it was gone, her account had $173 in unauthorized charges. She notified her financial institution within two days. How much is she potentially liable for? $50
Brandon lost his debit card. When he realized it was gone, his account had $238 in unauthorized charges. Since he was embarrassed about his loss, he didn’t contact his financial institution for 70 days. What is the most that he is liable for? $238
All of the following are deposit institutions except: -a commerical bank-a credit union-a finance company-a mutual savings bank-a savings and loan assoication a finance company
All of the following are non-deposit institutions except:-a credit card company-an investment company-a life insurance company-a finance company-a credit union a credit union
Which of the following primarily provides loans for home purchases? A mortgage company
When Angela wanted to provide financial security for her dependents, she considered purchasing a product that would provide income replacement in the event of her untimely death and also provide a savings/investment component while she is alive. Which company would she most likely do business with? life insurance company
Which of the following will likely provide the most expensive loans? a payday loan company
Why are some financial service operations referred to as financial supermarkets? they offer a combination for services from one source
a drawback of a regular savings account is a relatively low rate of return
Zach wants to open an account, but he doesn’t know which
Categories
Finance Flashcards

Principles of Finance – C708 WGU Pre Assessment

Corporations establish goals in areas including finance, diversity, and social responsibility. Match the corporate goal with the area that it addresses. Answer options may be used more than once or not at all. Select your answers from the pull-down list. Environmental goalDiversity goalFinancial goalFinancial goal Environmental goal-Create zero wasteDiversity goal-Promote women and minoritiesFinancial goal-Make a profitable investment for the companyFinancial goal-Switch to a freight company that provides a high volume discount
An analysis of a potential purchase of a new piece of equipment has been completed. The analysis included a review of the initial cost of the equipment, annual operating expenses, and the value of the expected increased production adjusted for the time value of money over the life of the equipment. Place the investments in the order they should be selected based on their valuation (from highest to lowest value). Select your answers from the pull-down list. Total costs of $700,000 and expected income $850,000Total costs of $500,000 and expected income of $700,000Total costs of $700,000 and expected income $875,000Total costs of $500,000 and expected income $600,000 2) Total costs of $700,000 and expected income $850,0003) Total costs of $500,000 and expected income of $700,0001) Total costs of $700,000 and expected income $875,0004) Total costs of $500,000 and expected income $600,000
Classify each item as to whether it has or lacks a fundamental influence on valuation. Answer options may be used more than once or not at all. Select your answers from the pull-down list. Fundamental influence-Opportunity costFundamental influence-Cash flowNot a fundamental influence-Taxable incomeNot a fundamental influence-Revenue recognition
Which scenario illustrates the strong form of the efficient market hypothesis (EMH)? An investor is making an investment decision based on public information, as well as private information that is known only to company insiders. This type of information is also known as insider trading.
A company’s accounting records include inflated numbers that give the company a higher net income than its actual numbers. This overstatement was agreed upon by the company and its auditors. This collusion between the company and its auditors would be caught rather quickly due to regulations. What agency regulates accounting practices between companies and their accounting firms? Public Company Accounting Oversight Board
In credit unions, boards of directors that hire executives are elected from among volunteering members (whereas in commercial banks, they are hired by the stockholders from among non-member outsiders). Which agency problem with banks does this structure seek to eliminate? Between owners and board of directors
Why is transferability of ownership relatively easy in the case of corporations? Stocks can be bought and sold in the stock market.
Match each account to the pair of financial accounting statements that it appears on. Answer options may be used more than once or not at all. Select your answers from the pull-down list. Cash-Balance sheet and statement of cash flowsNet income-Income statement and statement of cash flowsRetained earnings-Balance sheet and income statement
How could a company that has a positive accounting income also be in trouble of going bankrupt when looking at its cash balance? Accounting income does not take into account the cash that is needed to pay salaries and dividends.
Which section of the statement of cash flows includes such transactions as paying dividends to shareholders, repurchasing common stock, and proceeds from the sale of long-term debt? Cash flows from financing activities
Use the following income statement for the current year. Assume the sales are 35% higher than the last year sales of $800,000. Calculate the net income. $604,000
Assume that the cost of goods sold for 2012 increases 10% from the previous year. Other expenses remain constant for 2012. What is the net income forecast for the year 2012?$65,000-5,850 $59,150
Use the following partial income statement data to answer the question below. What is the 2013 ending balance of accounts payable? $7,600
Use the following information to answer the question below.Cash balance was a fixed percentage of sales for 2012. The same percentage will be used for 2013 for cash. Accounts Receivables were $4,500 in 2013.Sales in 2012 were $87,000.Sales in 2013 are projected at $99,300.Inventory increased by 10% for 2013. What is the ending cash balance for 2013? $2,850
The income statement for Serentic Inc. for 2011 is shown below. With a net income of $15,000, tax rate was at 27% in 2012, and the board of directors decided to cut the dividend payments by 50%. 2011Sales $77,280COGS $47,914Gross Margin $29,366SG&A Expense $7,890Depreciation expense $2,090EBIT $19,386Interest Expense $860Taxable Income $18,526Taxes $5,373Net Income $13,154Dividends $850Retained earnings $12,304What are the retained earnings for 2012? $22,829
Jane Eden works at CIME Inc. in the finance department. She was examining the finance forecasts given below. Product management was very optimistic about the forecasts because the net income showed a very positive trend. Jane was cautious, so she conducted percentage sales analysis. What is the correct action for Jane to take, given the above figures? Analyze the increases in marketing expenses to get a better understanding before presenting the analysis to management.
Ellen Ekman is a finance manager for Cubist Inc. She was discussing the financial forecast with the team from marketing, production, purchasing, and accounting. This team had provided the three scenarios for sales forecast for the business plan. The three scenarios show unit forecasts for the next six years at different levels of optimism. When Ellen examines the assumptions, she finds that the team has used the same price for Product A under all these assumptions. From her point of view, the sales forecasts need to take into account prices, since she believes that the higher unit forecast should assume lower prices. What is the correct action for Ellen to take in this situation? Ask the team to provide market research analysis and competitive intelligence to support these three forecasts and pricing assumptions.
What is a limitation of financial forecasting and analysis? When new products are launched, these could make the ratios less reliable since there is no historic information on new products.
Which statement concerning the use of ratio analysis for long-term forecasting versus short-termforecasting is appropriate? Generally for shorter time periods there is a high chance that the ratio could be more stable, since drastic changes in products and components used in these products is less likely.
What is the face value of a bond? Principal
Which formula shows the future value of $25,000 that earns an annual interest rate of 3% for six years? $25,000 x (1 + 0.03) 6
What are two considerations in investing? Choose 2 answers Liquidity Risk Return Length of payback period Risk Return
Which three factors are lenders compensated for through interest payments? Choose 3 answers Opportunity cost of having the money unavailable for the length of the loanThe fact that the loan principal is guaranteed to be more valuable in the future Risk associated with making a loanLosses incurred due to government regulation Expected inflation for the period of the loanSudden changes in interest rates on the day that the loan was made Opportunity cost of having the money unavailable for the length of the loanRisk associated with making a loanExpected inflation for the period of the loan
Which two statements are true of compounding interest? Choose 2 answers A person will earn less interest when compounding occurs more frequently. A person will earn interest on previously earned interest. A person will earn more interest when compounding occurs more frequently. A person will earn interest on the principle only. A person will earn interest on previously earned interest. A person will earn more interest when compounding occurs more frequently.
Rank in order from highest to lowest the following investments in terms of future value for a $1,000 investment for 1 year. Answer options may be used more than once or not at all. Select your answers from the pull-down list. Choices:$1,000 invested at 8% per year, compounded quarterly$1,000 invested at 4% per year, compounded semiannually$1,000 invested at 2% per year, compounded yearly$1,000 invested at 8% per year, compounded weekly Rank 1 $1,000 invested at 8% per year, compounded weeklyRank 2 $1,000 invested at 8% per year, compounded quarterlyRank 3 $1,000 invested at 4% per year, compounded semiannuallyRank 4 Rank 4 $1,000 invested at 2% per year, compounded yearly
Match the present values for the following ten-year investments with the following cash flows. Answer options may be used more than once or not at all. Select your answers from the pull-down list. $6,418 Present value of annual $1,000 cash flows at 9% per year$6,231 Present value of semiannual $500 cash flows at 10% per year compounded semiannually$6,276 Present value of quarterly $250 cash flows at 10% per year compounded quarterly$5,268 Present value of annual $750 cash flows at 7% per year
What annual interest rate would John need to earn if he wanted a $1,000 per month contribution to grow to $65,000 in five years?Choices:2.8%3.2%4.4%5.4% 3.2%
Sam invested $1,000,000 in an investment that will make him and his descendants a payment forever. Which two factors affect how much that payment will be? Choose 2 answers The number of years that Sam livedThe annual rate of return earned on the investmentThe number of years that Sam’s descendants will liveThe number of times per year that the payment is receivedThe number of descendants that Sam has The annual rate of return earned on the investmentThe number of times per year that the payment is received
A share of stock in the local fast food restaurant chain will pay a next dividend in the amount of $1.50. It is expected that dividends paid for stocks from this restaurant will grow by 1% per year. The appropriate discount rate for stocks of this type is 6%. What is the per share value of this stock?Choices$22.75$30.00$37.50$45.25 $30.00
Holly is trying to calculate the present value of an ordinary annuity for a practice exam on her old financial calculator. Match the appropriate number to the symbol Holly will use on the calculator for finding the present value of a series of three payments, made at the end of each year, of $5,000. The current available rate of return is 4% and there is no future value. The list of available symbols includes PMT, PV, FV, N, and I/Y. Answer options may be used more than once or not at all. Select your answers from the pull down list. YourChoicesI/Y 4PMT $5,000N 3FV 0PV -$13,875.46 ChoicesI/Y 4PMT $5,000N 3FV 0PV -$13,875.46
Place the following ordinary annuity options in order from lowest present value to highest present value. Answer options may be used more than once or not at all. Select your answer from a pull-down list. One payment of $1,200, for each of three years, with an annual discount rate of 4% Twelve payments of $100 each, for each of three years, with an annual discount rate of 4% Four payments of $300 each, for each of three years, with an annual discount rate of 4% Two payments of $600 each, for each of three years, with an annual discount rate of 4%. Place the following ordinary annuity options in order from lowest present value to highest present value. Answer options may be used more than once or not at all. Select your answer from a pull-down list. 1 One payment of $1,200, for each of three years, with an annual discount rate of 4%4 Twelve payments of $100 each, for each of three years, with an annual discount rate of 4%3 Four payments of $300 each, for each of three years, with an annual discount rate of 4%2 Two payments of $600 each, for each of three years, with an annual discount rate of 4%.
Ben just won the lottery and has a choice between accepting a lump sum payment of $5,000,000 or annual payments of $375,000 at the end of each year for the next 30 years, which he could then invest in a financial instrument that will pay him 6%. Ben decides to take the annual payments. How much is this choice worth today?Choices$4,989.237.91$5,003,714.82$5,161,811.68$6,271,390.46 $5,161,811.68
The only difference between two contracts to purchase a new laptop is that the one vendor wants to be paid at the beginning of each month, starting immediately, whereas the other vendor wants to be paid at the end of each month. This is the difference between present value calculated as an ordinary annuity and the present value of an annuity due. Assume Ashley decides to make payments of $100 per month for 15 months at an annual discount rate of 8%. How much would Ashley save on the laptop if she chose the vendor that wanted to be paid at the end of the month?$8.12$9.49$10.25$13.27 $9.49
Mark is saving for new furniture and saving $200 at the beginning of each month. He can save at an annual rate of 5%, compounded monthly for the next two years. How much will Mark be able to save?Choices$4,890.08$4,971.16$5,001.30$5,058.17 $5,058.17
Karter has an amortized loan of equal payments over an extended period of time. How does the proportion of Karter’s payment that goes to interest fluctuate?YourAnswer CorrectAnswer AnswerChoices The amount starts higher and goes downThe amount starts lower and goes upThe amount always equals the proportion of principle that Karter is payingThe amount remains at zero until the end of the loan The amount starts higher and goes down
How much will Matthew be able to borrow to buy a car if he can get 1.5% annual interest, compounded monthly, on a 60-month loan, and can afford $300 payments each month?YourAnswer CorrectAnswer AnswerChoices$16,781.98 $17,331.13$18,268.13$19,245.16 $17,331.13
Larry believes that he will benefit by investing in common stock shares rather than preferred. Which statement regarding his investment choice is appropriate?YourAnswer CorrectAnswer AnswerChoices He does not want to incur any unnecessary risk. He believes that the company will be profitable.He fears that the company could fail.He does not want to vote for members of the board of directors. He believes that the company will be profitable.
An investor receives a $30 dividend on her share of preferred stock, valued at $375. What rate of return is she earning?YourAnswer CorrectAnswer AnswerChoices6%7% 8%10% 8%
The price of a share of stock is $25.00 and the current expected rate of return is 15%, with a constant growth rate of 3%. What is the next expected dividend (D1)?YourAnswer CorrectAnswer AnswerChoices$2.50 $3.00 $3.50$4.50 $3.00
The price of a stock is $40.00 per share and there is an expected rate of return on shares of this kind of 17%. Dividends have been growing at a constant rate of 2%. What must be the value of D0 and D1?YourAnswer CorrectAnswer AnswerChoices $4.58 and $5.89$5.50 and $6.25$5.67 and $6.23 $5.88 and $6.00 $5.88 and $6.00
A share of stock is expected to have a very high dividend growth rate of 10% for the next two years, and then will settle back to its standard 2% dividend growth rate. Assume that the last paid dividend was $3.00 and the expected rate of return is 18%. What is the value of this share of stock?YourAnswer CorrectAnswer AnswerChoices$21.76 $22.02$25.87$26.12 $22.02
A stock is going to exhibit larger growth of 10% in its dividends for the next 4 years and then will settle back to the standard dividend growth rate of 6% when the company’s patent runs out. The last paid dividend ( D 0) was $3.00 and the expected rate of return is 16%. What is the value of the stock, P 0?YourAnswer CorrectAnswer AnswerChoices$30.20$33.20 $36.26 $42.95 $36.26
Kevin is comparing investments and knows that he will earn 16% on a share of common stock, but is concerned about the risk of investing in common stock. He can buy a share of preferred stock for $30.00 and knows that the dividend for that share is a constant $3.60. What is the rate of return on the preferred share?YourAnswer CorrectAnswer AnswerChoices10% 12%15%17% 12%
When presented with an investment opportunity, Joseph knows that calculating the interest rate associated with that investment is really important. Currently, he is evaluating a stock that will pay its next dividend in the amount of $6.50, and has a constant dividend growth rate of 5%. He can buy this stock for $65 per share. What is the discount rate associated with this stock?YourAnswer CorrectAnswer AnswerChoices 10% 12%15%18% 12%
What will an investor pay for a zero-coupon bond that has a $2,000 face value, a 25-year maturity, and a 7% yield to maturity?YourAnswer CorrectAnswer AnswerChoices$257.98$316.29 $368.50$452.10 $368.50
What are three characteristics of a bond? Choose 3 answers YourAnswer CorrectAnswer AnswerChoices Interest paid on bonds is deductible for tax purposes for the issuer. Bonds have no predetermined lifespan. Bonds represent debt of the issuer.Periodic payments made to the bond holder by the issuer vary. When bonds mature, they are worth their face value. When bonds mature, they are worth what the market thinks they are worth. Interest paid on bonds is deductible for tax purposes for the issuer.Bonds represent debt of the issuer. When bonds mature, they are worth their face value.
A $1,000 face value bond with 20-year maturity makes a coupon payment of 10% every year and is on the market for its face value. What is its yield to maturity?YourAnswer CorrectAnswer AnswerChoices8% 10%12%20% 10%
A 10-year bond has a face value of $1,000, an annual coupon rate of 12%, and a current price of $1,268.40. What is the yield to maturity for the bond?YourAnswer CorrectAnswer AnswerChoices6% 8%10% 12% 8%
Margot is thinking about changing her portfolio contents. She had planned to sell a $1,000 face value bond that she bought one year ago for $1,052.97 with a yield to maturity of 7%. This bond pays $75 per year in coupon payments and had a 20-year maturity last year when she bought it. Market interest rates have now risen to 10%. What is the current value of Margot’s bond one year later?YourAnswer CorrectAnswer AnswerChoices$699.27 $790.88$800.51 $1000.00 $790.88
WorldQuest has an excellent rating for its bonds. WorldQuest is a global enterprise. It has 20% debt ratio and its earnings have been stable for the past 8 years. The cost of equity to WorldQuest is 19%. The board of directors do not want the debt ratio to exceed 40%. Its total capital currently is $520 million with 20% debt. WorldQuest plans to raise $50 million in additional capital. Its investment banking firm assesses that it can raise $50 million in debt with 30-year long-term bonds at 5.5% interest. Which financing option will WorldQuest use?YourAnswer CorrectAnswer AnswerChoices WorldQuest has good bond ratings, so it should use long-term bonds at 5.5% interest rate.WorldQuest has 20% debt ratio, so it should issue preferred stock.The revenues of WorldQuest Inc. are stable, so it should issue common stock.Since WorldQuest is an international firm, it should issue equity. WorldQuest has good bond ratings, so it should use long-term bonds at 5.5% interest rate.
Firm A and Firm B currently have $200 million in capital structure. Firm A has 70% debt in its capital structure, and Firm B has 20% debt in its capital structure. Both firms are in the same industry and market their products to the same customers. Also, both businesses are stable and both firms need to raise an additional $40 million in capital. Which firm will find it relatively easy to raise capital through debt issue at a reasonable interest cost?YourAnswer CorrectAnswer AnswerChoicesFirm A, because it has higher debt capacity Firm B, because it has higher debt capacityFirm A, because it has 70% debtFirm B, because it has same type of customers Firm B, because it has higher debt capacity
Dr. Tim Brown started a biotech firm in 2005 with a few of his colleagues who were also scientists. It was a private firm and the firm did well for several years. In 2012, the founding owners decided to go public and had an IPO. The executive team mostly consists of Dr. Tim Brown and his colleagues who founded the firm. In recent years, the firm sales have slowed down. The compensation plan for the executive team is tied to the number of patents, research activities, and publications. The executive team is of the opinion that incentive tied to research performance should increase. This will help the company come up with new patents. The firm now has stockholders and a board of directors. What changes should the board of directors institute in the compensation plan for the executive team in order to address the slowdown in sales?YourAnswer CorrectAnswer AnswerChoices Increase incentive plans tied to research performance as needed by the executive.Allow more flexible time for company employees.Increase vacation time for management. Institute an incentive component tied explicitly to financial performance. Institute an incentive component tied explicitly to financial performance.
Bytek has $450 million in capital structure with $175 million in debt. The company is planning on raising an additional $40 million in debt for licensing a new product that it will market in the United States. This would increase the company’s debt ratio to 48%. The firm’s interest payments will increase by $4.2 million a year. Why does the bankruptcy risk increase to Bytek with additional debt?YourAnswer CorrectAnswer AnswerChoices Interest payment on debt is a legal obligation, which Bytek has to meet.Bytek is required to make payments to its common stockholders. Bytek is required to pay dividends to preferred stockholders.The equity-to-debt ratio has decreased. Interest payment on debt is a legal obligation, which Bytek has to meet.
Budfast Inc. is evaluating three investment opportunities. There are three products that management wants to investigate. These products have all the life of 14 years and the expected return and risk are given below. Standard deviation is a measure of risk for Budfast Inc. Budfast Inc. requires a return of at least 18% on its projects, which have a standard deviation below 10%. If the risk level is higher than or equal to 10%, it requires a return above 25%. Classify these projects as either meeting or not meeting Budfast Inc.’s criteria for accepting the project? Answer options may be used more than once or not at all. Select your answer from the pull-down list. YourAnswer CorrectAnswer AnswerChoices Accept the project Accept the project Product PDo not accept the project Accept the project Product QAccept the project Do not accept the project Product R Accept the project Product PAccept the project Product QDo not accept the project Product R
CellZweo is evaluating four new products for development and marketing. CellZweo Inc. has a required rate of return of 12% on its new investment projects, if the project has no risk. On this rate of return, CellZweo also requires a premium of 4% premium for high-risk projects and 2% premium on average-risk projects. The rate of return on these candidates is given below. Risk Level ReturnProduct P High Risk 18%Product Q Average Risk 16%Product R Average Risk 12%Product S No Risk 10%Classify these projects as either meeting or not meeting CellZweo’s criteria for accepting the project? Answer options may be used more than once or not at all. Select your answer from the pull-down list. YourAnswer CorrectAnswer AnswerChoices Meets the criteria to accept the project Meets the criteria to accept the project Product P Meets the criteria to accept the project Meets the criteria to accept the project Product Q Does not meet the criteria to accept the project Does not meet the criteria to accept the project Product R Does not meet the criteria to accept the project Does not meet the criteria to accept the project Product S Meets the criteria to accept the project Product PMeets the criteria to accept the project Product QDoes not meet the criteria to accept the project Product RDoes not meet the criteria to accept the project Product S
What is a characteristic of market risk?Choices It is not possible to eliminate or reduce market risk through diversification.Market risk does not affect all industries; it affects only a few industries.Investors cannot eliminate market risk by increasing the number of stocks in their portfolio.Market risk is good for competition. It is not possible to eliminate or reduce market risk through diversification.
Crescent Corporation has total capital of $440 million. The ratio of debt to total capital is .35 and common stock is 40% of the total capital. Crescent Corporation has outstanding preferred stock, which has paid 8% dividends consistently for the past five years. The interest on debt is 7% and the cost of common stock is 19.4%. Crescent Corporation has a 38% tax rate. What is the weighted average cost of capital for Crescent Corporation?YourAnswer CorrectAnswer AnswerChoices13.4% 12.9% 11.3%10.6% 11.3%
Great Tuna Inc. currently pays $5 dividend on its common stock. These dividends are expected to grow by 4% each year, perpetually. The current price of Great Tuna Inc. stock is $63. Great Tuna Inc. plans on raising $75 million in capital by issuing common stock. The flotation costs are 3%. What is the cost of common stock for Great Tuna Inc.?YourAnswer CorrectAnswer AnswerChoices10.6%11.9% 12.5%13.8% 12.5%
Sailing Inc. manufactures and markets engines and batteries for small boats. Management wanted to expand, and Sailing Inc. decided to make engines and batteries for bigger boats. Dan Tufts was evaluating the financial viability of this long-term investment proposition by using net present value analysis. From his view, these additional investment projects are risky compared to Sailing’s current business. This has more fierce competition and Sailing Inc. does not have experience in this market. Weighted average cost of capital is used as the discount rate by Sailing Inc. for net present value analysis. Why did Dan decide to adjust weighted average cost of capital?YourAnswer CorrectAnswer AnswerChoicesStockholders would be happy with the additional risk that Sailing Inc. has undertaken.The risk in these projects can be eliminated by adjusting the discount rate. Sailing Inc. used different discount rates for high-risk projects. The new projects are long-term projects and different discount rates are used. Sailing Inc. used different discount rates for high-risk projects.
Rudner Inc. plans to float $25 million in bonds and $10 million in preferred stock. The current price of its preferred stock is $50 and it pays $2.60 in preferred dividends, which is likely to continue for the next five years. CrestInvest is its investment banking firm. It will charge 5% in flotation fees to float these securities. Crestnvest will sell these bonds with a 20-year maturity and 6.5% annual coupon rate at par value. Rudner has a tax rate of 35%. What is the cost of preferred stock and debt to Rudner after taxes, taking into account the flotation costs?YourAnswer CorrectAnswer AnswerChoicesCost of preferred stock is 5.9%; cost of bonds is 2.8% Cost of preferred stock is 5.5%; cost of bonds is 4.5%Cost of preferred stock is 3.9%; cost of bonds is 4.1% Cost of preferred stock is 4.6%; cost of bonds is 5.6% Cost of preferred stock is 5.5%; cost of bonds is 4.5%
A small convenience store fully depreciates a refrigerator with a cost basis of $4,000, and then sells it for $4,200. How would this transaction be taxed?YourAnswer CorrectAnswer AnswerChoices As capital gainsAs ordinary income Both as capital gains and ordinary incomeAs capital losses As capital gains
A hospital sells two of its older ambulances from its fleet for a total of $40,000, and the applicable tax rate is 25%. Book value is $18,000 per truck. How much cash flow would the hospital generate from this sale?YourAnswer CorrectAnswer AnswerChoices$49,000 $29,000 $39,000$69,000 $39,000
The tax savings from an expense item are $75,000 for a company that spends 25% of its income to taxes. How much does the item cost before taxes?YourAnswer CorrectAnswer AnswerChoices$150,000$200,000$250,000 $300,000 $300,000
A company’s after-tax income is $720,000 in an area where the corporate tax rate is 22%. What was the company’s net cash flow that year?YourAnswer CorrectAnswer AnswerChoices$392,650$568,230$612,400 $923,000 $923,000
Which two concepts determine opportunity cost of an investment option? Choose 2 answers YourAnswer CorrectAnswer AnswerChoices Sunk costs of the chosen option Expected returns from the foregone optionSunk costs of the foregone option Expected costs of the foregone option Expected returns from the foregone option Expected costs of the foregone option
The cash flow schedule below provides a positive net present value for a company. What is the weighted cost of capital for this investment? YourAnswer CorrectAnswer AnswerChoices4% 6% 8%10% 8%
How long is the payback period for an investment project if it requires $25,000 to start, and generates $7,000 a year after-taxes for six years?YourAnswer CorrectAnswer AnswerChoices2 years3 years 4 years6 years 4 years
A company considered an investment opportunity that takes an initial investment of $75,000 and yields after-tax cash flow of $32,000 for the first three years and $12,000 for the following two years. Which two statements could be said of this project if the company decides to invest in the opportunity? Choose 2 answers YourAnswer CorrectAnswer AnswerChoicesIRR is less than 12%. IRR is higher than 13%. Hurdle rate can be 20%. Hurdle rate can be 24%. IRR is higher than 13%. Hurdle rate can be 20%.
When NPV and IRR drive an investor to choose different investment opportunities, how should the investor make a decision?YourAnswer CorrectAnswer AnswerChoices Choose the opportunity for which the difference between IRR and hurdle rate is the highest.Choose the opportunity for which hurdle rate exceeds the IRR. Choose the opportunity that offers the highest NPV.Choose the opportunity with zero NPV. Choose the opportunity that offers the highest NPV.
Edwards Investments wants to invest $100,000 in two of the projects identified below to realize a return of at least 12% a year. Which two projects that have different directions of cash flows would be appropriate to invest in? Choose 2 answers YourAnswer CorrectAnswer AnswerChoices IRR 17%, NPV $60,000 IRR 10%, NPV $62,000IRR 18%, NPV $60,000 IRR 13%, NPV $62,000 IRR 10%, NPV $62,000 IRR 13%, NPV $62,000
If an investment offers the cash flow schedule as indicated below, which evaluation method would be more appropriate to use? CF1: $10,000 CF2: $8,500 CF3: ($1,250) CF4: $3,125 CF5: ($750) CF6: $4,935YourAnswer CorrectAnswer AnswerChoices IRRPayback period NPVHurdle rate NPV
The cash flow schedule for an investment opportunity is shown below: Year 1: $5,000 Year 2: $6,000 Year 3: $8,250 Year 4: $6,500 Year 5: $4,500 If the IRR is 13% a year, how much capital is required for this investment?YourAnswer CorrectAnswer AnswerChoices $15,773 $21,270$31,112$10,598 $21,270
Wade and Sons Investment Consultancy considers an investment opportunity that requires $323,000 to start. If the company realizes the cash flow schedule indicated below, what is the project’s IRR? CF1: $100,000 CF2: $112,200 CF3: $107,050 CF4: $87,500 CF5: $90,250YourAnswer CorrectAnswer AnswerChoices22% 17% 30%14% 17%
If an investment project requires $61,500 to start, and promises $17,000 a year for 7 years, what is the payback period?YourAnswer CorrectAnswer AnswerChoices3 years 4 years5 years6 years 4 years
What could an investor review, in addition to the financial statements, to determine why the company experienced a much higher cost of sales in a specific fiscal year?YourAnswer CorrectAnswer AnswerChoices Media including the Internet Other analysts’ opinionsStock returnsComparative data Media including the Internet
Which information service provides market share information for an investor?YourAnswer CorrectAnswer AnswerChoicesNew York TimesCompany’s annual report Standard and Poors Pro forma reports from the company Standard and Poors
Use the following financial statements to answer the question below. Balance Sheet Cash 1,000Accounts Receivable 3,000Inventory 4,000Current Assets 8,000Fixed Assets, Net 2,000Total Assets 10,000Accounts Payable 2,000Accruals 1,000Current Liabilities 3,000Long Term Debt 3,000Total Liabilities 6,000Total Equity 4,000Total Liabilities & Equity 10,000Income Statement Revenue 20,000Cost of Sales 10,000Gross Profit 10,000Operating Expenses 5,750Operating Profit 4,250Interest Expense 250Income Before Taxes 4,000Taxes 1,600Net Income 2,400What is the assets turnover ratio for the company?YourAnswer CorrectAnswer AnswerChoices1.001.33 2.00 2.67 2.00
Use the following financial statements to answer the question below. Balance Sheet Cash 2,000Accounts Receivable 3,000Inventory 5,000Current Assets 10,000Fixed Assets, Net 3,000Total Assets 13,000Accounts Payable 4,000Accruals 2,000Current Liabilities 6,000Long Term Debt 2,000Total Liabilities 8,000Total Equity 5,000Total Liabilities & Equity 13,000Income Statement Revenue 20,000Cost of Sales 8,000Gross Profit 12,000Operating Expenses 6,550Operating Profit 5,450Interest Expense 250Income Before Taxes 5,200Taxes 1,900Net Income 3,300What is the gross profit margin for the company?YourAnswer CorrectAnswer AnswerChoices0.27 0.280.58 0.60 0.60
Which ratio is used to measure profitability?YourAnswer CorrectAnswer AnswerChoicesQuick ratioLeverage ratioInventory turnover ratio Net profit margin ratio Net profit margin ratio
What is an investor measuring if the investor is calculating a company’s net profit margin and return on assets ratios?YourAnswer CorrectAnswer AnswerChoices ProfitabilityLiquidityEfficiencyRelative value Profitability
Which company would have the highest Dupont model?YourAnswer CorrectAnswer AnswerChoices XYZ company has a profit margin of 50%, total asset turnover of .5, and financial leverage of 3ABC company has a profit margin of 20%, total asset turnover of 7, and financial leverage of .6MNO company has a profit margin of 30%, total asset turnover of .6, and financial leverage of 3EFG company has a profit margin of 60%, total asset turnover of .4, and financial leverage of 2 XYZ company has a profit margin of 50%, total asset turnover of .5, and financial leverage of 3
Place the companies listed below in order from highest value (1) to lowest value (4), based on their Dupont analysis. Answer options may be used more than once or not at all. Select your answer from the pull-down list. Company Profit Margin Total Asset Turnover Financial LeverageA. ABC 20% 7 .6B. EFG 60% 2 .4C. MNO 30% .6 3D. XYZ 50% .5 3 Choices 1 A. 4 B. 3 C. 2 D. 1 A. 4 B. 3 C. 2 D.
Which source of information provides additional company information that is not found in the company’s annual report?YourAnswer CorrectAnswer AnswerChoices Letter from CEO Market shareManagement discussionBalance sheet Market share
Use the given chart to answer the following question. What is the overall trend in long-term debt?YourAnswer CorrectAnswer AnswerChoicesLong-term debt is up.Long-term debt is up and then drops.Long-term debt is down and then rises. Long-term debt is down year after year. Long-term debt is down year after year.
Use the given chart to answer the following question. Which balance sheet item decreased each year since 2009?YourAnswer CorrectAnswer AnswerChoicesTotal EquityEarnings Before Taxes Total Fixed Assets and Long-Term DebtCurrent Liabilities and Total Fixed Assets Total Fixed Assets and Long-Term Debt
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
Categories
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

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.
Categories
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