Finance 3040 True/False (6 pts each) A is True / B is False
1. The primary goal of any company should be to maximize current period profits.
2. The stocks of major corporations trade in many markets throughout the world on a continuous or near-continuous basis.
3. For corporate bonds, the higher the credit quality of an issuer, the higher the interest rate.
4. The cost of capital is the minimum acceptable rate of return for capital investment.
5. The principal reason for excluding many intangible assets from the balance sheet is that they are difficult to value.
6. Balance sheets have traditionally recorded amounts in terms of market values.
7. If the market value of assets is high, then the market value of liabilities must be high also.
8. If net income is positive, then cash flow from operations is positive also for that period.
9. An increase in accounts receivable balance provides an increase in cash flow.
10. To calculate the cash produced by the business it is necessary to add back the depreciation charge and to subtract the expenditure on new equipment.
11. Converting an ordinary annuity to an annuity due decreases the present value.
12. An investor in a short position at $25/share profits when they cover at $20/share.
13. A stop order turns into a market order once the stop price is hit.
14. An investor selling shares on NYSE (in a market order) would receive the Specialist’s quoted Ask price.Multiple Choice (6 pts each)
15. Assume the total expense for your current year in college equals $20,000. Approximately how much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount?
A. $ 952.00
16. Short-term financing commonly occurs in the:
A. primary markets.
B. secondary markets.
C. capital markets.
D. money markets.
17. Which of the following financial assets might be least
likely to have an active secondary market?
A. Common stock of a large firm
B. Bank loans made to smaller firms
C. Bonds of a major, multinational corporation
D. Debt issued by the U.S. Treasury
18. Corporate debt instruments are most commonly traded:
A. on the NYSE.
B. on NASDAQ.
C. in the money market.
D. in the over-the-counter market.
19. Which of the following statements is not
characteristic of mutual funds?
A. They are financial institutions.
B. They raise money by selling shares to investors.
C. They pool the savings of many investors.
D. They offer professional management.
20. Which of the following is least
A. Foreign currency
B. U.S. Treasury bonds
C. Rare coins
D. Savings deposit
21. The fundamental difference between IFRS and GAAP is:
A. GAAP rely more on general principles but ignores the spirit of those principles.
B. GAAP rely more on specific rules and the spirit of the rules.
C. GAAP rely more on specific rules but not the spirit of the rules.
D. GAAP rely more on general principles as well as the spirit of those rules.
22. In the context of housing, what is an ARM?
A. A mortgage with high initial payments, offset by significantly lower payments later
B. A mortgage with low initial payments, offset by significantly higher payments later
C. A mortgage with no initial payments, offset by significantly high payments later
D. A mortgage with equal payments per period
23. A furniture store is offering free credit on purchases over $1,000. You observe that a big-screen television can be purchased for nothing down and $4,000 due in one year. The store next door offers an identical television for $3,650 but does not offer credit terms. Which statement below best describes the “free” credit?
A. The “free” credit costs about 8.75%.
B. The “free” credit costs about 9.13%.
C. The “free” credit costs about 9.59%.
D. The “free” credit effectively costs zero%.
24. What is the present value of the following payment stream, discounted at 8% annually: $1,000 at the end of year 1, $2,000 at the end of year 2, and $3,000 at the end of year 3?
25. In a partnership form of organization, income tax liability, if any, is incurred by:
A. the partnership itself.
B. the partners individually.
C. both the partnership and the partners.
D. neither the partnership nor the partners.
26. How much more is a perpetuity of $1,000 worth than an annuity of the same amount for 20 years? Assume an 10% interest rate and cash flows at end of period.
27. Which of the following would be considered an advantage of the sole proprietorship form of organization?
A. Wide access to capital markets
B. Unlimited liability
C. A pool of expertise
D. Profits taxed at only the personal level
28. Which of the following is not
an advantage to incorporating a business?
A. Easier access to financial markets
B. Limited liability
C. Becoming a permanent legal entity
D. Profits taxed at the corporate level and the shareholder level
29. If $120,000 is borrowed for a home mortgage, to be repaid at 9% interest over 30 years with monthly payments of $965.55, how much interest is paid over the life of the loan?
30. A board of directors is elected as a representative of the corporation’s:
A. top management.
31. When the management of a business is conducted by individuals other than the owners, the business is more likely to be a:
B. sole proprietorship.
D. general partner.
32. “Double taxation” refers to:
A. all partners paying equal taxes on profits.
B. corporations paying taxes on both dividends and retained earnings.
C. paying taxes on profits at the corporate level and dividends at the personal level.
D. the fact that marginal tax rates are doubled for corporations.
33. Corporate managers are expected to make corporate decisions that are in the best interest of:
A. top corporate management.
B. the corporation’s board of directors.
C. the corporation’s shareholders.
D. all corporate employees.
34. Your real estate agent mentions that homes in your price range require a payment of approximately $1,200 per month over 30 years at 9% interest. What is the approximate size of the mortgage with these terms?
35. Approximately how much should be accumulated by the beginning of retirement to provide a $2,500 monthly check that will last for 25 years, during which time the fund will earn 8% interest with monthly compounding?
36. With $1.5 million in an account expected to earn 8% annually over the retiree’s 30 years of life expectancy, what annual annuity can be withdrawn, beginning today?
37. How much can be accumulated for retirement if $2,000 is deposited annually, beginning 1 year from today, and the account earns 9% interest compounded annually for 40 years?
A. $ 87,200.00
38. What is the minimum nominal rate of return that you should accept if you require a 4% real rate of return and the rate of inflation is expected to average 3.5% during the investment period?
39. A credit card account that charges interest at the rate of 1.25% per month would have an annually compounded rate of _______ and an APR of _______.
A. 16.08%; 15.00%
B. 14.55%; 16.08%
C. 12.68%; 15.00%
D. 15.00%; 14.55%
40. A financial manager facing a capital budgeting decision must decide whether to:
A. issue stock or debt securities.
B. use the money market or capital market.
C. use primary markets or secondary markets.
D. buy new machinery or repair the old.
41. How may a reduction in cash dividends be in the best interests of current shareholders?
A. A reduction of cash dividends is always
in the best interests of current shareholders.
B. The firm will have available cash to increase current investment and future profits.
C. Reduced dividends increase managerial compensation, thus increasing their motivation.
D. A reduction of cash dividends cannot
be in the best interests of current shareholders.
42. 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.
43. 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:
B. fully depreciated.
C. one-half depreciated.
D. equal in value to the firm’s current assets.
44. 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.
45. What is the effective annual interest rate on a 9% APR automobile loan that has monthly payments?
46. What is the present value of your trust fund if it promises to pay you $50,000 on your 30th birthday (7 years from today) and earns 10% compounded annually?
47. A share of IBM stock is purchased by an individual investor for $75 and later sold to another investor for $125. Who profits from this sale?
B. The first investor.
C. The second investor.
D. Profit is split between IBM and the investor.
48. Which of the following cash outflows does not
reduce a firm’s net income?
A. Income taxes
B. Interest expense
D. Depreciation expense
49. 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.
50. 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.