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FIN 3400 Chapter 01- Chapter 14 Assignment PACKAGE DEAL 2022 - Florida International University
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FIN 3400 Chapter 01 Assignment Questions and Answers- Florida International University
FIN 3400 Chapter 01 Assignment Questions and Answers- Florida International University CH 01 What result should you expect from firms that make wise fina... [Show More] ncial decisions? Multiple choice question. You should expect the wealth of individuals to increase in the future. You should expect investors to lose their excess funds. You should expect firms to decrease their level of output. You should expect the economy to remain stable over time. Which one of the following statements correctly identifies a group that supplies money to the financial markets? Multiple choice question. Individuals saving for retirement provide money to the financial markets. The research and development departments of major corporations provide money to the financial markets. Young, start-up firms provide money to the financial markets. Banks provide money to the financial markets. Which one of these is an example of a borrower in the financial markets? Multiple choice question. Rich's is closing a manufacturing plant and plans to sell all the assets of that plant. Lester's wants to expand its operations but has insufficient cash to do so. Sally wants to invest money for the next five years for an extended vacation. Ted's wants to open an additional retail outlet and plans to use its current excess cash to pay the initial opening costs. Which of these best illustrates how funds flow in a financial system? Multiple choice question. A company retains earnings that flow to financial institutions. An individual analyzes a project and receives financing from a company. A financial institution offers both checking and savings accounts An individual invests in a bank savings account and the bank lends money to companies. Which one of these is an investments activity? Multiple choice question. Kate pays $800 a month for food. Kristie pays $200 a month on her credit card. Mark spent $800 on a new TV. Sue has $200 a month deposited into a stock mutual fund. True or false: Managerial finance helps managers make decisions related to cash management, capital investments, and risk reduction. True false question. True False Select all that apply The subarea of finance known as financial management addresses which of these decisions? Select all that apply. Multiple select question. How can corporate taxes be minimized? How might foreign political risk affect the value of a new project? How can a firm attract more capital financing? Should a firm issue debt (bonds) or equity (stocks)? Which group has individual investors as participants and is a lender of funds to the financial markets? Multiple choice question. People with both money and ideas lend funds to the financial markets. People with no ideas and no money lend funds to the financial markets. People with money and no ideas lend funds to the financial markets. People with ideas and no money lend funds to the financial markets. Financial institutions contribute to the dynamics of which one of the following rates? Multiple choice question. Interest rates Dividend growth rates Inflation rates Exchange rates Which firm is a borrower of funds in the financial markets? Multiple choice question. Sid's has been in business for three years but is now closing its doors. JKL Co. has developed a new product but has discovered there is no market demand for it. Lew's is very successful and has excess cash available so is expanding its product line. Ken's has a new product that it is ready to market to the public as soon as financing can be arranged. International finance does which one of the following? Multiple choice question. International finance deals solely with foreign investments made by individual investors. International finance applies only to transactions involving foreign banking institutions. International finance is related solely to business decisions involving foreign operations. International finance applies finance theory to a global world with changing political, currency, and legal environments. What role does a financial institution play in a financial system? Multiple choice question. Financial institutions must decide how much capital to return to investors. Financial institutions must decide which projects to fund. Financial institutions must assess which investment opportunities are right for their needs. Financial institutions must distribute capital in an efficient manner. Financial decisions compare the rewards of a decision with the of the decisions. Which of these correctly defines a role of investments? Multiple choice question. Investments are concerned with helping banks determine the amount of capital they can lend. Investments addresses which projects a firm should finance. Investments are concerned with which operations should be conducted overseas. Investments address the timing of cash flows most desired by investors. You are comparing four stocks of equal risk. Which stock should have the highest price in today's market? Multiple choice question. Stock C pays a constant $2 a year dividend and has no plans to change that amount. Stock B currently pays $2 a year in dividends and is decreasing the dividend by $.20 each year. Stock A currently pays $2 a year in dividends and increases that amount by $.50 annually. Stock D currently pays $2 a year in dividends and expects to increase that amount by $.10 every other year. Financial management relates to which one of the following? Multiple choice question. Financial management relates to the use of finance theory in a global business environment. RISKS Financial management relates to the facilitation of capital flows between investors and firms. Financial management relates to a firm's decisions regarding the acquisition and use of funds. Financial management relates to the analysis and process of choosing securities and other assets to purchase. Which one of these examples best illustrates the definition of time value of money? Multiple choice question. A new convertible that you would like to buy costs $36,800 today. A gift of $10,000 to be received in two years is worth $8,900 today. You have $4,500 saved while your sister has $5,600 saved. Your grandmother promised to give you $15,000 upon your graduation from college. What is the primary function of a financial institution? Multiple choice question. A financial institution facilitates cash flows between investors and companies. A financial institution provides a means of saving for retirement. A financial institution provides checking accounts to facilitate payments. A financial institution provides credit cards to consumers. Which of these provides the best description of the difference between accounting and finance? Multiple choice question. Accounting is centered on current and future activities while finance focuses on the analysis of past transactions. Finance is the recording of accounting transactions that have occurred or are expected to occur. Accounting and finance are interchangeable terms which have the same meaning and application. Accounting records past activities of a firm while finance helps with decisions regarding the firm's future. Which of these decisions involves international finance? Assume the firms are U. S. firms. Multiple choice question. Imports Ltd. decides to open a new distribution center in Iowa. Exports Ltd. decides to open a new domestic retail outlet. Imports Ltd. decides to invest its excess cash in U. S. Treasury bills. Exports Ltd. decides to open a warehouse in Europe. Which one of these functions is a treasury function? Multiple choice question. Overseeing the data processing functions Managing the firm's taxes Managing the firm's pension plan Overseeing the accounting functions Financial decision making compares which of the following factors? Multiple choice question. Financial decision making compares financial assets with real assets. Financial decision making compares a project's cost to its risks. Financial decision making compares the timing of a cash flow to its size. Financial decision making compares rewards with risks. Which of these is an example of how finance is used throughout a firm? Multiple choice question. Finance can be used to determine the accounting value of an asset being used in any department of a firm. Finance can be used for cost/benefit analysis. Finance can be used to determine how taxes are to be allocated to a firm's various divisions. Finance can be used to determine which applicant to hire. The current value of a financial asset is determined by which of the following cash flows? Multiple choice question. The value of a financial asset is determined by the asset's historical cash flows. The value of a financial asset is determined by the asset's expected future cash flows. The value of a financial asset is determined by the asset's past and expected future cash flows. The value of a financial asset is determined by the asset's past, present, and future cash flows. Which of these are personal financial decisions? Multiple select question. Samantha financed her mortgage for 20 rather than 30 years to save on interest. Kendyll moved money from her checking account to her savings account to earn interest. Marie decided that leasing a car was cheaper for her than buying a car. Jessica decided to spend her morning mowing the yard rather than cleaning the house. How is the time value of money (TVM) theory best defined? Multiple choice question. TVM is the application of valuing timing of future cash flows. TVM is the theory of evaluating cash flow risks. TVM is the theory of ranking cash flows by dollar value. TVM is the theory and application of valuing cash flows at various points in time. Which one of the following best illustrates the definition of a sole proprietorship? Multiple choice question. The income Maria received from her business interest was taxed twice as income. Ido's portion of a firm's debts was $38,000 but he only lost the $20,000 investment he had in the company when it went bankrupt. Alberto received 60 percent of the income from a business and had that income taxed as personal income. Ted was forced to sell his personal home in order to pay the debts of a business he owned in entirety. True or false: Finance is more concerned about the past while accounting is more concerned about the future. True false question. True False Which one of the following is an advantage of a sole proprietorship? Multiple choice question. Ease of formation Limited liability Unlimited liability Limited operational control Select all that apply Which of the following are finance functions that fall under the supervision of the treasurer? Multiple select question. Capital spending Interest rate hedging Managing taxes Managing cash Which one of these best defines a general partnership? Multiple choice question. Four sisters form a business which goes bankrupt. Only one sister is liable for all the firm's debts. A brother and sister form a business. The firm goes bankrupt but neither owner has to repay the firm's debts. Three brothers form a business. None of the brothers are liable for the firm's debts. A brother and sister form a business. The brother incurs all the firm's debts but the sister has to repay all the debtors. Which one of these is NOT a financial decision made within a firm? Multiple choice question. The president decides to fire the company treasurer for ethical violations. Operations decides to pay overtime rather than hire another employee. The personnel department decides to switch its employee health insurer due to changes in costs. The sales department decides to cancel newspaper advertising due to low sales generation from that advertising. Which one of these is an advantage of a general partnership? Multiple choice question. Unlimited capital Limited liability Single taxation Tax-free profits Which of these is an example of a personal financial decision? Multiple choice question. Sue opted to increase her company retirement plan contribution to 6 percent of her salary. Faith decided to watch TV rather than one of the DVDs she owns. Tom decided to spend his Saturday cleaning out his garage rather than planting his garden. Tami decided to order her new car in red rather than in blue. How is a public corporation defined? Multiple choice question. A public corporation is defined as a firm with 1,000 or more individual owners, A public corporation is defined as a firm with a large number of owners, each of whom has unlimited liability for a percentage of the firm's debts. A public corporation is a firm owned by a large number of stockholders from the general public. A public corporation is a firm with a large number of owners who directly control its operations. What is the definition of a sole proprietorship? Multiple choice question. A sole proprietorship is owned by a single individual but is financed by a venture capitalist. A sole proprietorship is a business entity that is not legally separate from its owner. A sole proprietorship is owned by a single individual whose personal assets are legally separated from the business assets. A sole proprietorship is owned by a single individual who enjoys limited liability. Which aspect of a corporation is viewed as a disadvantage? Multiple choice question. Owners' liability Property ownership Taxation Legal status Which one of these features is an advantage of a sole proprietorship? Multiple choice question. Personal liability for all business debts Tax-free earnings Ease of raising capital Less regulation than other business forms What are the two key characteristics of a hybrid organization? Multiple choice question. Unlimited capital and unlimited liability Limited size and double taxation Shared control and unlimited size Single taxation and limited liability What is the definition of a general partnership? Multiple choice question. A general partnership involves multiple business owners who are each personally responsible for all of the partnership's debts. A general partnership is defined as joint ownership of a firm with some partners having limited liability while others have unlimited liability. A general partnership is defined as a business entity where each partner owns an equal share of the business. A general partnership is joint ownership of a firm where each owner is responsible for only a portion of the partnership's debts. Which characteristic is an advantage of a hybrid organization? Multiple choice question. Government restrictions Investment capital Owners' liability Firm size Which one of these features would be considered the most advantageous benefit of a general partnership? Multiple choice question. Personal liability limited to percentage of ownership Management control spread amongst the partners Increased capital financing as compared to a sole proprietorship Substantial growth obtainable without changing the form of ownership Select all that apply Which of these features could accurately be included in the definition of a corporation? Select all that apply. Multiple select question. Double taxation Division of ownership and control Separate legal entity Limited access to capital Select all that apply Which of the following are the well-developed viewpoints that have arisen regarding the goal of a firm? Multiple select question. Emphasize social responsibility Maximize sales Maximize market share Maximize shareholder wealth Which one of the following is a disadvantage of the corporate form of business? Multiple choice question. Access to capital markets Separation of management and ownership Limited liability for owners Legal status A person who works for a firm, but is not necessarily an owner, is called Multiple choice question. a shareholder an agent the principal a stockholder Which is the best definition of a hybrid organization? Multiple choice question. A hybrid organization is a business form that has some attributes of a corporation and some of proprietorships/partnerships. A hybrid organization is a firm that started as a sole proprietorship and changed its form to a corporation. A hybrid organization is a business form that offers single taxation of its profits. A hybrid organization is a firm that offers limited liability to its owners in exchange for double taxation, What is the definition of an agency problem? Multiple choice question. An agency problem is defined as the difficulties that arise when a principal hires an agent and cannot fully monitor the agent's actions. An agency problem is defined as a situation where two employees of a firm cannot work together in harmony. An agency problem is defined as a situation where the owners of a firm are also the firm's managers. An agency problem is defined as a situation where an employee puts the interests of his employer ahead of his own interests. Which one of the following is an advantage offered by a hybrid organization? Multiple choice question. Single taxation Limited lines of business Limited capital Limited size Which one of these best defines corporate governance? Multiple choice question. Corporate governance is the compilation and production of a document which outlines acceptable corporate behavior. Corporate governance is the official chain of command within an organization. Corporate governance is the ongoing process of monitoring managers and aligning their incentives with shareholder goals. Corporate governance ensures all decision makers within a firm are also shareholders of that firm. Which one of these is an advantage of a general partnership? Multiple choice question. Unlimited capital Tax-free profits Limited liability Single taxation Select all that apply Which of these parties monitor corporate activities from outside as part of corporate governance? Select all that apply. Multiple select question. Chief financial officer Auditors Credit analysts Investment analysts Putting the interests of which party first should be the primary goal of a corporation? Multiple choice question. Managers Employees Government Shareholders Which of these best defines ethics? Multiple choice question. Ethics is the process of changing people's behaviors to match your own ideals. Ethics is the study of how people act when they are not being monitored. Ethics is the study of how people behave when they are monitored. Ethics is the study of values, morals, and morality. Travis owns a bakery and Mia is a baker. How could an agency relationship exist between these two individuals? Multiple choice question. Travis could sell part of the business to Mia creating a partnership. Mia would then be the agent and Travis would be the principal. Travis could hire Mia to work for him. Travis would be the agent and Mia would be the principal. Travis could hire Mia to work for him. Travis would be the principal and Mia would be the agent. Travis could sell part of the business to Mia creating a partnership. Mia would then be the principal and Travis would be the agent. Which one of these relationships best fits the definition of a fiduciary relationship? Multiple choice question. Harry keeps all his cash in a safety deposit box at the bank. Marti donated some used items to the local thrift store to help the needy. Sid gave Fred cash in exchange for his used motorcycle. Al's retirement funds are managed by the trust department at the local bank. An agency problem is defined as a situation where a firm's managers fail to put the interests of which one of these parties first when making decisions? Multiple choice question. Government Employees Shareholders Community The profitability of financial market intermediaries depends upon which of these? Multiple choice question. Successful execution of unique professional services Aggressive sales and advertising staff Questionable business practices Market domination within a firm's industry Corporate governance is the set of laws, policies, incentives, and monitors designed to handle issues arising from which one of these? Multiple choice question. Separation of internal and external accountants Separation of business divisions Separation of geographic business locations Separation of ownership and control One change brought by TCJA is that only the interest on the first of mortgage debt is deductible. Select all that apply Which of these is a monitor of corporate governance? Select all that apply. Multiple select question. Chief executive officer Board of directors Securities and Exchange Commission Controller True or false: After TCJA, U.S. companies are more likely to "bring home" foreign profits due to the new flat tax rate. True false question. True False True or false: Ethics is the study of values, morals, and business judgments. True false question. True False What is the definition of a fiduciary relationship? Multiple choice question. A fiduciary relationship is an agreement between two parties to work together on a joint project. A fiduciary relationship is defined as the relationship that exists between a donor and a recipient of a financial asset. A fiduciary relationship is a relationship where one party is indebted to another party. A fiduciary relationship is a legal duty between two parties where one party must act in the interest of the other party. Which of these factors are credited for providing financial institutions with high profit margins? Multiple choice question. 750,000 Inefficient markets and monopoly power Unique assets and market control Expertise and monopoly power Expertise and unique assets The net impact of the lower individual income tax rates brought by TCJA is expected to be (choose all that apply): Multiple select question. Increased pressure on companies to use debt financing More potential savings on the part of investors More free cash for consumers to spend Downward pressure on housing sales in the high-value market The TCJA established a flat corporate tax rate of: Multiple choice question. 34 percent 21 percent 25 percent 35 percent [Show Less]
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FIN 3400 Chapter 02 Assignment Questions and Answers- Florida International University
FIN 3400 Chapter 02 Assignment Questions and Answers- Florida International University Which one of these is not one of the four basic financial statement... [Show More] s? Multiple choice question. Statement of ratios Balance sheet Statement of cash flows Income statement Which one of these correctly defines the balance sheet identity? Multiple choice question. Liabilities - Equity = Assets Equity = Assets - Liabilities Liabilities = Assets + Equity Equity = Assets + Liabilities A firm has fixed assets of $28,000, long-term debt of $12,000, current liabilities of $4,000, current assets of $5,000 and equity of $17,000. What is the total of the assets side of the balance sheet of the firm? Multiple choice question. $28,000 $17,000 $29,000 $33,000 Which of these examples best defines a liquid asset? Multiple choice question. Mia sold 100 shares of stock today at the going market price. Dell sold a car today and received less than the market value. Courtney sold her used textbook valued at $50 to her best friend for $25 today. Ernst tried to sell his used truck today but had no success. Select all that apply Which of these assets are generally converted into cash within one year? Select all that apply. Multiple select question. Accounts receivable Inventory Equipment Patents and trademarks A financial statement provides an _______-based picture of a firm's financial condition. Multiple choice question. management accounting market marketing What is the balance sheet identity formula? Multiple choice question. Assets + Equity = Liabilities Assets = Liabilities + Equity Assets + Liabilities = Equity Assets = Liabilities - Equity Select all that apply Which of these are equity accounts? Select all that apply. Multiple select question. Common stock Accounts payable Retained earnings Preferred stock Click and drag on elements in order Rank these assets in order of liquidity with the most liquid asset listed first. Instructions Drag and drop application. 1. Cash 2. Accounts receivable 3. Inventory 4. Plant and equipment What is the definition of liabilities? Multiple choice question. Liabilities are funds invested in the firm by the firm's shareholders. Liabilities are monies owed to a firm by its customers. Liabilities are funds provided by lenders to a firm. Liabilities are funds which a firm invests for the long-term. What is the definition of liquidity? Multiple choice question. Liquidity is the time required to sell an asset at a profit. Liquidity is the time it takes to convert an asset into cash at any price. Liquidity is the ease of conversion of an asset into cash at a fair value. Liquidity is the speed at which an asset can be converted into cash. Select all that apply Which of these assets have useful lives exceeding one year and are classified as fixed assets? Select all that apply. Multiple select question. Inventory Machinery Building Land Which one of these is a current liability? Multiple choice question. 20-year mortgage loan 6-month note payable 3-year bank loan 10-year bonds Which one of these is not one of the four basic financial statements? Multiple choice question. Balance sheet Statement of cash flows Statement of ratios Income statement Which one of these questions can be answered by monitoring a firm's balance sheets? Multiple choice question. Percentage increase in sales Level of net working capital Change in profitability Market value of firm Which one of these reports the amount of money a firm owes its creditors within the next year? Multiple choice question. Long-term debt Current liabilities Current assets Fixed asset Which one of these actions meets the definition of a liability? Multiple choice question. Corner Bank loans $100,000 to the Corner Bakery for two years. Georgia purchased 100 shares of a firm's common stock. Sal's suits sells a suit to Al on credit. A firm purchased $300 of goods from a supplier for cash. Which one of these statements correctly applies to straight-line depreciation? Multiple choice question. Straight-line depreciation is most commonly used when computing a firm's taxes. Straight-line depreciation is commonly used when compiling financial statements. Straight-line depreciation decreases a firm's taxes more in the early years than does MACRS depreciation. Straight-line depreciation provides a greater tax deduction over the life of an asset than does MACRS depreciation. Select all that apply Which of these accounts are included in net working capital? Select all that apply. Multiple select question. Equipment Inventory Notes payable Long-term debt payable Select all that apply Which of these accounts are current liabilities? Select all that apply. Multiple select question. Accrued wages Bonds payable Notes payable Accounts payable Balance sheets list assets in declining order of liquidity. Which of these orders best illustrates this? Multiple choice question. Cash, inventory, accounts receivable, plant and equipment Accounts receivable, cash, inventory, plant and equipment Cash, accounts receivable, inventory, plant and equipment Cash, accounts receivable, plant and equipment, inventory Select all that apply Which of these questions can be answered by monitoring a firm's balance sheets for last year and this year? Select all that apply. Multiple select question. Is the firm more or less liquid than last year? Did the firm's taxes increase or decrease since last year? Did the firm earn more or less profit per dollar of sales than it did last year? Did the firm issue additional shares of stock this year? Select all that apply Which of these are equity accounts? Select all that apply. Multiple select question. Accounts payable Preferred stock Retained earnings Common stock True or false: Net working capital is a measure of a firm's ability to pay its bills for the next year. True false question. True False Which type of depreciation offers the greatest tax deferral benefit in the early years of an asset's life? Multiple choice question. Straight-line depreciation MACRS depreciation MACRS and straight-line depreciation offer the same tax deferral benefits each year. Neither MACRS nor straight-line depreciation offer any tax deferral benefits. Which relationship of liquidity is correct? Multiple choice question. The liquidity of an asset is inversely related to the profitability of that asset. The liquidity of an asset is unrelated to the profitability of that asset. The liquidity of an asset is directly related to the profitability of that asset. Select all that apply Which of these accounts are included in net working capital? Select all that apply. Multiple select question. Accounts payable Accounts receivable Retained earnings Cash Which one of these assets is considered to be the most liquid? Multiple choice question. Plant and equipment Inventory Accounts receivable Land Which account is the least liquid of the current asset accounts? Multiple choice question. Cash Patent Inventory Accounts receivable Which one of these questions can be answered by monitoring a firm's balance sheets? Multiple choice question. Market value of firm Level of net working capital Percentage increase in sales Change in profitability True or false: An increase in the financial leverage of a firm reduces both the firm's profits and its losses. True false question. True False What is the definition of net working capital? Multiple choice question. Net working capital is the sum of a firm's cash and marketable securities accounts. Net working capital is the amount of cash a firm has on hand as of a specific date. Net working capital is the difference between a firm's current assets and current liabilities. Net working capital is the value of a firm's assets that can be converted into cash in one year or less. What is the definition of an income statement? Multiple choice question. An income statement reports total revenues and expenses as of a specific date. An income statement reports the cash inflows and outflows of a firm as of a specific date. An income statement reports total revenues and expenses over a specific period of time. An income statement reports the cash inflows and outflows of a firm over a specific period of time. Which one of these relationships regarding liquidity is correct? Multiple choice question. As the liquidity of assets increases, so does the firm's probability of experiencing financial distress. As the liquidity of assets increases, so does the firm's profits on those assets. As the liquidity of assets increases, both the firm's probability of financial distress and its profits on those assets increase. As the liquidity of assets increases, both the firm's probability of financial distress and its profits on those assets decrease. Which one of the following best illustrates a highly liquid asset? Multiple choice question. Sale of a $100 asset by tomorrow at a price of $100. Sale of a $100 asset today at a price of $90. Sale of a $100 asset within 10 days at a price of $100. Sale of a $100 asset within the hour at a price of $85. Which of these statements regarding the structure of an income statement is (are) correct? Select all that apply. Multiple select question. EBIT= Gross profit - Depreciation - Other operating expenses EBIT = Addition to retained earnings + Taxes + Interest EBT = Dividends paid + Addition to retained earnings + Taxes Gross profit = Net sales - Cost of goods sold Balance sheets list assets in declining order of liquidity. Which of these orders best illustrates this? Multiple choice question. Accounts receivable, cash, inventory, plant and equipment Cash, inventory, accounts receivable, plant and equipment Cash, accounts receivable, plant and equipment, inventory Cash, accounts receivable, inventory, plant and equipment Which party has a residual claim to a firm's cash flows? Multiple choice question. Stockholders Employees Managers Debt holders A change in financial leverage does which one of the following? Multiple choice question. An increase in financial leverage reduces a firm's total debt. A decrease in financial leverage decreases the risks faced by the firm. An increase in financial leverage can decrease both a firm's profits and its losses. A decrease in financial leverage decreases the amount of a firm financed with equity. An income statement is best defined by which one of these statements? Multiple choice question. An income statement reflects the profits, but not the losses generated by a firm's revenues and expenses. An income statement reflects the total revenues that a firm earns over a period of time and the total expenses incurred to generate those sales. An income statement reflects values as of a single date. An income statement reflects the total costs incurred to produce net sales for a given date. Which of one of these statements best illustrates the definition of a marginal tax rate? Multiple choice question. Don paid $28,000 in taxes on his $100,000 income, or 28 percent. Antonio will pay $0.28 more in taxes if his taxable income increases by $1, or 28 percent. Fredrico paid no tax on his $16,400 income, or zero percent. Suenette paid $13,400 in taxes on a taxable income of $52,000, or 25.8 percent. Which relationship of liquidity is correct? Multiple choice question. The liquidity of an asset is inversely related to the profitability of that asset. The liquidity of an asset is unrelated to the profitability of that asset. The liquidity of an asset is directly related to the profitability of that asset. Which one of these statements related to the recording of financial statement items based on GAAP is (are) correct? Multiple choice question. Expenses related to the production of a product are recorded on the income statement when cash is used to pay those expenses. The cost of a fixed asset is expensed when payment for the asset is made. Expenses related to the production of a product are recorded on the income statement when that product is sold, not when the expenses are paid. The cost of salaries are recorded on the income statement when those wages are paid. The operating profit is equal to earnings before interest and taxes. True false question. True False Fill in the Blank Question holders have first claim to the cash flows of the firm. Which one of these accounts is a noncash expense? Multiple choice question. Wages Depreciation Dividends paid Rent True or false: An increase in the financial leverage of a firm reduces both the firm's profits and its losses. True false question. True False Which one of the following is a use of cash? Multiple choice question. Sale of common stock Increase in a current liability Increase in a fixed asset Net income What is the definition of a marginal tax rate? Debt Multiple choice question. The marginal tax rate is the percentage of each dollar of taxable income that the firm pays in taxes. The marginal tax rate is the percentage of every additional dollar of sales that a firm must pay out in taxes. The marginal tax rate is the amount of additional taxes a firm must pay out for every additional dollar of taxable income it earns. The marginal tax rate is defined as the total tax liability stated as a percentage of the total taxable income. Explain why following GAAP to record sales on an income statement may differ from the cash flows generated by those sales. Multiple choice question. GAAP requires the revenue from a sale be recorded only when all the costs of that sale have been paid, not when the cash flow from the sale occurs. GAAP requires the revenue from a sale be recorded at the time of sale, which may not coincide with the cash flow from the sale. GAAP allows each firm to determine when it will record a sale. Cash flows from sales may occur at a different time. GAAP requires the revenue from a sale be recorded when payment is received, so there are no differences. True or false: A decrease in a long-term asset account balance is a cash flow from investing activity. True false question. True False Which one of these is a subtraction from the cash flows from investing activities? Multiple choice question. Decrease in a fixed asset Decrease in other long-term assets Increase in a fixed asset Increase in inventory Which one of these accounts is a noncash expense? Multiple choice question. Employee benefits Amortization Utilities Legal expense Which one of these is a cash flow from a financing activity? Multiple choice question. Decrease in loans payable Increase in accounts payable Decrease in accounts payable Increase in fixed assets Select all that apply Which of these is (are) a source of cash? Select all that apply. Multiple select question. Decrease in inventory Increase in accounts receivable Decrease in accounts payable Increase in long-term debt Which one of these is a subtraction from the cash flows from financing activities? Multiple choice question. Buying back common stock Borrowing money for five years Obtaining a mortgage Selling preferred stock Which of one of these statements best illustrates the definition of a marginal tax rate? Multiple choice question. Don paid $28,000 in taxes on his $100,000 income, or 28 percent. Fredrico paid no tax on his $16,400 income, or zero percent. Suenette paid $13,400 in taxes on a taxable income of $52,000, or 25.8 percent. Antonio will pay $0.28 more in taxes if his taxable income increases by $1, or 28 percent. Cash flows from financing activities are defined as the cash flows resulting from which one of the following? Multiple choice question. Marketable securities transactions Debt and equity financing transactions Purchases and sales of long-term assets Production and sales of products Which one of these is a cash flow from an investing activity? Multiple choice question. Increase/decrease in preferred stock Increase/decrease in fixed assets Increase/decrease in notes payable Increase/decrease in inventory A firm has an operating cash flow of $600, a net change in gross fixed assets of $100, and a change in net operating working capital of $50. What is the firm's free cash flow (FCF)? Multiple choice question. $550 $650 $450 $750 Which one of these is an addition to the cash flows from investing activities? Multiple choice question. Increase in fixed assets Dividend paid Decrease in other long-term assets Increase in common stock Assume net income is $32, cash dividends paid are $20, and the ending retained earnings balance is $44. What is the change in retained earnings for the period? Multiple choice question. $32 $56 $24 $12 Select all that apply Which of these are cash flows from financing activities? Select all that apply. Multiple select question. Increase in common stock Increase in accounts payable Preferred stock dividend Decrease in long-term debt The Sarbanes-Oxley Act of 2002 requires senior management of a firm to do which one of these? Multiple choice question. Certify the financial statements are accurate and representative of the firm's earnings Pay all profits immediately to shareholders in the form of dividends Maintain a constant stock price so investors will avoid future losses Manipulate the accounting rules to maximize profits for each period Select all that apply Which of these are additions to the cash flows from financing activities? Select all that apply. Multiple select question. Common stock dividend paid Increase in long-term debt Decrease in notes payable Increase in common stock What is the definition of a statement of cash flows? Multiple choice question. A statement of cash flows is a financial statement that reflects a firm's cash flows as of a specific date. A statement of cash flows is a financial statement that shows the firm's cash flows over a period of time. A statement of cash flows is a statement which reflects the changes in current assets over a period of time. A statement of cash flows is a statement which reflects changes in operating activities only as of a specific date. True or false: The cash flows that result from debt and equity financing transactions are cash flows from financing activities. True false question. True False A firm has EBIT of $600, depreciation of $200, and a tax rate of 34 percent. What is the operating cash flow? Multiple choice question. $264 $404 $596 $528 A statement of retained earnings showed a beginning retained earnings balance of $24 and an ending balance of $22. Net income was positive. What do you know given this information? Multiple choice question. Net income exceeded cash dividends paid. Cash dividends paid exceeded net income. No dividends were paid. Common stock dividends exceeded preferred stock dividends. Which of these is a requirement of the Sarbanes-Oxley Act of 2002? Multiple choice question. Public corporations are required to use MACRS for financial statement purposes. All public firms in the same industry must apply the same method of depreciation. Public corporations are required to artificially smooth their earnings. A corporate board's audit committee must have considerable experience with GAAP. Which one of these is the best definition of a statement of cash flows? Multiple choice question. A statement of cash flows reconciles the noncash balance sheet items to the noncash income statement items. A statement of cash flows summarizes the sources and uses of cash by type of cash flow. A statement of cash flows recaps the cash flows affecting the balance sheet of a firm. A statement of cash flows reconciles the cash balance sheet items to the cash income statement items. [Show Less]
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FIN 3400 Chapter 03 Assignment Questions and Answers- Florida International University
FIN 3400 Chapter 03 Assignment Questions and Answers- Florida International University The Shoe Store has cash of $300, accounts receivable of $700, accou... [Show More] nts payable of $800, inventory of $1,300, long-term debt of $1,900, and notes payable in three months of $500. What is the current ratio? Multiple choice question. 2.14 2.88 1.77 0.72 Reason: Current assets = $300 + $700 + $1,300 = $2,300 Current liabilities = $800 + $500 = $1,300 Current ratio = $2,300/$1,300 = 1.77 Jen's has current assets of $2,200, cash of $400, and inventory of $1,300. The firm has accounts payable of $300, long-term debt of $3,100, and accrued wages and taxes of $400. What is the quick ratio? Multiple choice question. 0.71 1.03 3.71 3.00 Orr's Hardware had a cash ratio of 0.12 last year as compared to 0.22 this year. How do you interpret this change? Multiple choice question. Orr's liquidity has decreased over the past year. Orr's will be bankrupt in less than three months because its cash ratio is less than 0.25. Orr's current ratio had to also increase over the past year. Orr's is less dependent now on its receivables and inventory to pay its current debt than it was one year ago. Al's Services has a current ratio of exactly 1.2 and a quick ratio of exactly 1.2. What can you infer from these ratios? Multiple choice question. Al's has no marketable securities. Al's sales are all cash sales. Al's has no inventory. Al's has insufficient liquid assets to pay its bills for the year. Last year, a firm had a current ratio of 1.14. This year, the ratio is 0.98. Assuming everything else equal, what do these values imply? Multiple choice question. The probability of the firm encountering financial distress is less now than it was a year ago. The firm has less current assets than it did one year ago. The firm paid off some of its short-term debt over the past year. The firm is less liquid this year than it was last year. Martin's has current assets of $600 and total assets of $2,900. The firm has total debt of $1,500 and long-term debt of $1,100. What is the current ratio? Multiple choice question. 1.5 0.4 2.6 0.7 Valley Markets has an inventory turnover of 3.2 and a capital intensity ratio of 1.9. What are the days in inventory for Valley Markets? Multiple choice question. 114 192 365 281 Valley Markets has an inventory turnover of 3.2 versus an industry average of 3.5 and a capital intensity ratio of 1.9 versus an industry average of 1.8. What can you determine about the efficiency of Valley Markets? Multiple choice question. Valley Markets uses its assets less efficiently than the average firm in its industry. Valley Markets uses its inventory less efficiently but its other assets more efficiently than the average firm in its industry. Valley Markets has less inventory but more total assets than the average firm in its industry. Valley Markets sells its inventory faster and uses its assets more efficiently than the average firm in its industry. Assume cash = $500, notes payable in six months = $600, accounts receivable = $900, inventory = $1,500, and accounts payable = $1,100. What is the quick ratio? Multiple choice question. 0.29 0.82 1.27 0.45 JJ's has a cash ratio of 0.25. How do you interpret this value? Multiple choice question. JJ's has sufficient cash and marketable securities to pay 25 percent of its current liabilities. JJ's has sufficient total assets to pay 25 percent of its total liabilities. JJ's has sufficient cash and marketable securities to pay 25 percent of its total liabilities. JJ's has sufficient total assets to pay 25 percent of its current liabilities. True or false: To reduce the number of days' sales held in inventory, a firm needs to decrease the inventory turnover rate. True false question. True False The Bakery has a quick ratio of 1. This means the firm can pay it short-term debts without doing which one of the following? Multiple choice question. Collecting its accounts receivable Spending its marketable securities Selling any inventory Using its cash Kelso's has an average collection period of 49 days. How do you interpret this? Multiple choice question. On average, Kelso's receives cash for a sale 49 days after a credit sale occurs. On average, Kelso's pays a supplier 49 days after it purchases goods from that supplier. On average, Kelso's receives cash for a sale 49 days after it paid its supplier for the product sold. On average, Kelso's receives cash for a sale 49 days after it has produced the product sold in that sale. Lester's has a current ratio of 0.86. What does this indicate? Multiple choice question. The firm has $0.86 in cash for every $1 it has in current liabilities. The firm has $0.86 in current assets for every $1 it must pay in obligations within the next year. The firm has $0.86 in current assets for every $1 of long-term debt. The firm has $0.86 in liquid assets for every $1 of debt. Oyster Fields has an average payment period of 21 days as compared to its industry average of 33 days. Suppliers in the industry have a 30-day credit policy. Which one of these statements most applies to Oyster Fields? Multiple choice question. Oyster Fields has a greater risk of being denied credit by its suppliers than do other firms in its industry. Oyster Fields is not maximizing its use of free financing. Oyster Fields is managing its accounts payable better than the average firm in its industry. Oyster Fields should increase its accounts payable turnover rate if it wants to match its industry. Russell's has a fixed asset turnover of 3.1. How do you interpret this information? Multiple choice question. Russell's requires $3.10 in fixed assets for every dollar of sales generated. Russell's generates $3.10 in sales for every dollar of long-term assets. Russell's requires $3.10 in long-term assets for every dollar of sales generated. Russell's generates $3.10 in sales for every dollar of fixed assets. Select all that apply How is inventory turnover related to days' sales in inventory? Select all that apply. Multiple select question. The shorter the inventory period, the higher the turnover rate The lower the turnover rate, the more days' sales that are held in inventory. The lower the turnover rate, the fewer days' sales that are held in inventory. The longer the inventory period, the higher the turnover rate. What must the capital intensity ratio be if the total asset turnover rate is 2? Multiple choice question. 0.5 1.0 Unknown, as there is no relationship between the two 2.0 PJ's has an average collection period of 42 days as compared to the industry average of 40 days. Which of these statements is supported by this information? Multiple choice question. PJ's manages its accounts receivables more efficiently than the average firm in its industry. PJ's collects its accounts receivable faster than the average firm in its industry. The industry, on average, turns over its accounts receivables more times a year than PJ's does. PJ's generates $42 in sales for every dollar in accounts receivable. True or false: The greater the debt the greater the financial leverage True false question. True False The suppliers of Denver Press offer the firm 30 days credit on all its purchases. Denver Press has an average payment period of 84 days as compared to its industry average of 43 days. Which of these statements applies to Denver Press? Multiple choice question. Denver Press stands a lower chance of losing its credit privileges with suppliers than the average firm in its industry. Denver Press is an illustration of best practices in accounts payable management. Denver Press is most likely abusing its credit terms. Denver Press is doing a much better job of managing its accounts payable than the average firm in its industry. How is a debt ratio of 0.45 interpreted? Multiple choice question. A debt ratio of 0.45 means that a firm has $0.45 of equity for every dollar of debt. A debt ratio of 0.45 means that for every dollar of assets, a firm has $0.45 of debt. A debt ratio of 0.45 means that a firm has $0.45 of debt for every dollar of equity. A debt ratio of 0.45 means a firm has $0.45 of current liabilities for every dollar of current assets. Over the past three years, Art's Bakery has increased its debt and lowered its equity. Which one of these statements is most apt to apply to this firm? Multiple choice question. The firm's debt service payments are decreasing. The firm's safety cushion that helps absorb earnings fluctuations is diminishing. The firm is decreasing its' potential for financial distress. The firm is decreasing its equity multiplier. Petty's has a fixed asset turnover of 2 and a sales to working capital ratio of 4. The industry averages are 1.5 and 3, respectively. Assume all firms in the industry use the same depreciation method and have equipment of similar age. Which one of these statements is correct? Multiple choice question. Petty's has twice the amount of net fixed assets as it does net working capital. Petty's requires $2 of net working capital for every dollar of net fixed assets. Petty's appears to have more excess production capacity than the average firm in its industry. Petty's asset management is clearly superior to that of its peers. DJ's has an equity multiplier of 1.5. Which one of these statements is correct given this information? Multiple choice question. For every dollar of equity, DJ's generates an additional $1.50 in retained earnings. For every $1 of equity, DJ's has $0.50 of debt and total assets of $1.50. For every dollar of equity financing, DJ's has $1.50 of debt financing. For every dollar of equity, DJ's generates sales of $1.50. Abel's has a total asset turnover rate of 2.2 as compared to its industry average of 1.8. Which one of these might be the cause of Abel's higher rate? Multiple choice question. Newer, more expensive assets, than its peers Generous accounts receivables policies Inventory stockouts More excess production capacity than its peers Last year, Delta's times interest earned ratio was 1.8. This year the ratio is 0.8. How should this change in value be interpreted? Multiple choice question. Delta's capital structure changed such that the firm now lies more on financial leverage. Delta's is replacing its outstanding debt at a slower rate than in the previous year. Delta's is better utilizing its debt this year and is increasing the financial stability of the firm. The decrease in the ratio to a value less than 1 indicates the firm's debt load may have become too large for the firm. Select all that apply Debt management ratios are used to do which of the following? Select all that apply. Multiple select question. Debt management ratios measure the capital structure of a firm. Debt management ratios determine whether or not a firm can meet its debt obligations. Debt management ratios determine the amount of financial leverage used by a firm. Debt management ratios determine the amount of assets a firm should hold once leverage is in place. Buster's has a debt ratio of 1.2. What does this imply? Multiple choice question. A debt ratio of 1.2 means a firm uses 20 percent more debt financing than equity financing. A debt ratio of 1.2 means a firm is bankrupt. A debt ratio of 1.2 means a firm has $1.20 in total assets for every dollar of total debt. A debt ratio of 1.2 means a firm has 20 percent more debt than it did in the previous period. What does a debt-to-equity ratio of 0.8 mean? Multiple choice question. A debt-to-equity ratio of 0.8 means the firm has $0.80 of debt for every $1 of equity. A debt-to-equity ratio of 0.8 means the firm finances 80 percent of its assets with debt and the other 20 percent with equity. A debt-to-equity ratio of 0.8 means the firm has 80 percent more debt than it does equity. A debt-to-equity ratio of 0.8 means the means firm has $0.80 of debt for every dollar of assets. Which one of these is equivalent in value to the equity multiplier? Multiple choice question. 1/(1 + Debt-to-equity ratio) 1 + Debt-to-equity ratio 1 + Debt ratio 1/(1 + Debt ratio) Northern Goods and Southern Goods have similar levels of EBIT and depreciation. However, Northern Goods has a much higher cash coverage ratio. Given this, which of these statements is correct? Multiple choice question. Northern Goods is diluting its return to stockholders more than its competitors are. Northern Goods is maximizing its use of financial leverage. Northern Goods is maximizing the tax benefits of debt. Northern Goods is maximizing its return to stockholders. ABE Co. has a times interest earned ratio of 3.2. How is this value interpreted? Multiple choice question. The net sales from operations is 3.2 greater than the interest income earned by a firm. The taxable income for the period is 3.2 times greater than the interest expense. The earnings before interest and taxes is 3.2 times greater than the firm's interest expense for the period. The net income is 3.2 times greater than firm's interest expense for the period. A firm has taxes of $2,000, interest expense of $1,000, EBIT of $7,500, common stock dividends of $1,500, and preferred dividends of $1,200. What is the profit margin if sales are $22,000? Multiple choice question. 8.18 percent 15.00 percent 20.45 percent 13.64 percent Treeline Resorts has a basic earnings power ratio of 1.6 compared to 1.8 for Outer Limits Resorts. Which one of these statements is correct based on this information? Multiple choice question. Treeline is earning $1.60 in net profits for every dollar of total assets. Outer Limits is earning more net profit per dollar of total assets than Treeline. Outer Limits is generating more operating profit per dollar of assets than Treeline. Outer Limits is earning $0.20 more in net profits per dollar of sales than Treeline. The return on assets reflects which value as a percentage of total assets? Multiple choice question. Addition to retained earnings Common stock dividends Net income available to common stockholders Net income available to preferred stockholders Over the past three years, Art's Bakery has increased its debt and lowered its equity. Which one of these statements is most apt to apply to this firm? Multiple choice question. The firm's debt service payments are decreasing. The firm is decreasing its' potential for financial distress. The firm is decreasing its equity multiplier. The firm's safety cushion that helps absorb earnings fluctuations is diminishing. What does a dividend payout of 45 percent indicate? Multiple choice question. A 45 percent dividend payout indicates a firm pays $0.45 of every dollar of net income to its common stockholders. A 45 percent dividend payout indicates a firm pays 45 percent of its net income available to common stockholders out in common dividends. A 45 percent dividend payout indicates a firm pays out 45 percent of its net income to its preferred and common stockholders. A 45 percent dividend payout indicates that common stockholders are earning a 45 percent return on their investment. Which one of these is a correct interpretation of a cash coverage ratio of 1.4? Multiple choice question. A cash coverage ratio of 1.4 indicates a firm has $1.40 in cash for every dollar of its annual fixed expenses. A cash coverage ratio of 1.4 indicates a firm generates $1.40 of operating cash for every dollar of interest and fixed charges that the firm owes. A cash coverage ratio of 1.4 indicates a firm has $1.40 in cash for every dollar of interest it owes for the year. A cash coverage ratio of 1.4 indicates a firm has $1.40 in operating cash for every dollar of long-term debt. Two firms have the same amount of assets and equity. Firm A has a marketto-book value of 3.6 compared to 2.9 for Firm B. Which one of these statements is generally correct given this information? Multiple choice question. Firm A is expected to outperform Firm B in the future. Firm A has a higher book value per share than Firm B. Firm A has a higher-priced stock per share than Firm B. Investors believe Firm B is a better firm than Firm A. Assume you are given the values for sales, taxable income, preferred and common stock dividends, interest, and the tax rate. How would you calculate the profit margin? Multiple choice question. Profit margin = {(Taxableincome×Taxrate) −Preferredandcommondividends}Taxableincome×TaxratePreferredandcommondividends/Sales Profit margin = {(Taxableincome×(1−Taxrate)) −Preferreddividends}Taxableincome×1-Taxrate-Preferreddividends/Sales Profit margin = {Taxableincome×(1−Taxrate)}Taxableincome×1- Taxrate/Sales Profit margin = (Taxableincome−Preferreddividends)TaxableincomePreferreddividends/Sales A firm has net income of $38,000, preferred stock dividends of $10,000, and common stock dividends of $8,000. The firm has 10,000 shares of common stock outstanding that sells for $46 a share. What is the price-earnings (PE) ratio? Multiple choice question. 23.00 16.43 20.00 12.11 If you want to compare the operations of similar firms without the firm's capital structure or tax status affecting that comparison, which ratio should you use? Multiple choice question. Profit margin Return on assets Return on equity Basic earnings power Generally speaking, a high price-earnings (PE) ratio indicates which one of the following as compared to a low PE ratio? Multiple choice question. Greater risk Lower earnings Slower dividend increases Slower growth Dee's had a return on assets (ROA) of 14.4 percent last year as compared to 14.7 percent this year. What do these ratio values imply? Multiple choice question. Dee's earned $0.147 for every dollar of common stockholders' equity for the period. Dee's returned more to its common shareholders this year than it did last year per dollar of common equity. Dee's overall performance declined from last year to this year. Dee's earned more income for its common shareholders per dollar of assets than it did last year. Select all that apply Which of the following are considered Asset Management ratios? Multiple select question. Cash Ratio Quick Ratio Capital Intensity Average Collection Period Times Interest Earned Ratio What does a dividend payout of 30 percent indicate if a firm has no preferred stock outstanding? Multiple choice question. A dividend payout of 30 percent for a firm with no preferred stock indicates the common stock dividends equal 30 percent of EBIT. A dividend payout of 30 percent for a firm with no preferred stock indicates that common stock dividends equal 30 percent of net sales. A dividend payout of 30 percent for a firm with no preferred stock indicates that common stock dividends equal 30 percent of net income. A dividend payout of 30 percent for a firm with no preferred stock indicates the common stock dividends equal 30 percent of taxable income. True or false: The DuPont system of analysis shows how the return on equity is dependent upon the return on assets. True false question. True False The Eatery has a market-to-book ratio of 3.2. What does this ratio indicate? Multiple choice question. A market-to-book value of 3.2 means a firm's stock is selling for 3.2 times the book value of the firm's debts. A market-to-book ratio of 3.2 means the net fixed assets would cost 3.2 times their book value if they were to be replaced. A market-to-book value of 3.2 means a firm's stock is worth 3.2 times the stock's value when it was originally issued. A market-to-book ratio of 3.2 means shareholders are willing to pay $3.20 per dollar of book equity to buy the firm's stock. Select all that apply Which of these are correct versions of the return on equity? Select all that apply. Multiple select question. ROE = ROA × (1+Debt−to−equity)1+Debt-to-equity ROE = ROA × (1/Capitalintensityratio)1/Capitalintensityratio ROE = Profit margin × Total asset turnover × Equity multiplier ROE = Profit margin × (1/Capitalintensityratio)1/Capitalintensityratio × (1+Debt−to−equity) NY News has net earnings per share of $3.24, a book value per share of $22, and a market-to-book ratio of 2.5. What is the price-earnings (PE)ratio? Multiple choice question. 27.16 22.08 16.98 5.89 The common-size balance sheet value of current assets was 0.21 last year and 0.23 this year. How do you interpret this? Multiple choice question. The dollar value of current assets decreased this year. Current assets as a percentage of total assets decreased. The dollar value of current assets increased this year. Current assets as a percentage of total assets increased. Walker's has a price-earnings (PE) ratio of 16 compared to its industry average of 17. Generally speaking, which one of these statements applies to this situation? Multiple choice question. Value-seeking investors will prefer another firm, which has the industry average PE, over Walker's. Walker's outperforms the average firm in its industry. The average firm in the industry outperforms Walker's. Investors expect Walker's to experience faster growth in the future than the average firm in its industry. Which one of these formulas correctly defines the retention ratio (RR) for a levered firm with both preferred and common stock? Multiple choice question. RR = 1 + Dividend payout RR = Addition to retained earnings/Net income RR = 1 - Dividend payout RR = Addition to retained earnings/Sales Which statement is correct? Multiple choice question. The sustainable growth rate is the maximum rate achievable using internal equity and debt financing and maintaining a constant debt-to-equity ratio. A common-size balance sheet allows firms to compare their profit margin both over time and to their competitors. The internal growth rate is the maximum rate at which a firm can grow given its current cash reserves. A common-size balance sheet allows a firm to compare its current assets as a percentage of sales over a period of time. How do you interpret an internal growth rate of 3 percent? Multiple choice question. The firm can grow by a maximum of 3 percent if it only uses internallygenerated financing. The firm can only grow by 3 percent while maintaining a constant debt ratio. The firm can grow by only 3 percent unless it issues additional debt. The firm can grow by 3 percent if it uses all available equity financing. Which one of these is the best definition of the DuPont system of analysis? Multiple choice question. The DuPont system is an analytical method of breaking the ROA and ROE down into their component pieces. The DuPont system is an analytical method of identifying the sources of a firm's net profits. The DuPont system is a method of analyzing the future outlook of a publicly traded firm. The DuPont system breaks the balance sheet down into component parts to ascertain the efficiency of a firm. Two firms have the same return on equity (ROE) for this year. Firm A retains 60 percent of its earnings as compared to Firm B's 40 percent. Which one of these statements is correct? Multiple choice question. Firm B has a lower payout ratio than Firm A. Firm A has a higher sustainable rate of growth than Firm B. Both firms will have the same sustainable rate of growth. Firm B has a higher sustainable rate of growth than Firm B. Which one of these is the correct fully deconstructed version of the return on assets? Multiple choice question. ROA = NetincomeavailabletocommonstockholdersSalesNetincomeavailabletocommonstockh oldersSales×SalesTotalassetsSalesTotalassets ROA = NetincomeSalesNetincomeSales×TotalassetsSalesTotalassetsSales×TotalassetsTotale quityTotalassetsTotalequity ROA = NetincomeavailabletocommonstockholdersTotalassetsNetincomeavailabletocommonst ockholdersTotalassets×TotalassetsSalesTotalassetsSales ROA = NetincomeavailabletocommonstockholdersSalesNetincomeavailabletocommonstockh oldersSales×TotalassetsCommonstockholders'equityTotalassetsCommonstockholders' equity Which of these best defines cross-sectional analysis? Multiple choice question. Cross-sectional analysis identifies trends within a firm's own ratios. Cross-sectional analysis analyzes the performance of a firm to other firms within the same geographic area. Cross-sectional analysis analyzes performance by comparing two separate ratios of a firm from one year to another. Cross-sectional analysis analyzes the performance of a firm against one or more companies in the same industry. The common-size values of both net income and costs of goods sold increased this year over last year. What does this mean? Multiple choice question. Taxes, as a percentage of sales, had to decrease. The firm had better control over its production and other expenses this year than it did last year. Both the gross profit and the net profit of the firm improved this year. As a percentage of sales, the cost of goods sold increased while the sum of total expenses, interest, and taxes decreased for the year. Select all that apply Which of these is (are) a factor which requires caution when using ratios to evaluate firm performance? Select all that apply. Multiple select question. Limiting comparisons to local firms within the same industry Window dressing of annual financial statements by some firms Doing cross-sectional analysis on various firms whose financial statements all conform to GAAP Comparing firms with varying fiscal years What is the retention ratio? Multiple choice question. The retention ratio is the percentage of net income available to common stockholders that is added to retained earnings. The retention ratio is the percentage of taxable income that is retained for payment of income taxes. The retention ratio is the percentage of net income that is held to pay the preferred dividends. The retention ratio is equal to 1 + Dividend payout ratio. Assume a firm has an equity multiplier of 1.2. Given this, what is the relationship between the internal growth rate and the sustainable growth rate? Multiple choice question. There is no relationship between ROE, ROA, and the rates of growth. Sustainable growth rate > Internal growth rate Internal growth rate > Sustainable growth rate Sustainable growth rate = Internal growth rate Which one of these statements correctly interprets a sustainable growth rate of 4 percent? Multiple choice question. A firm can grow by 4 percent annually without issuing any new debt or new equity. A firm can grow by 4 percent annually provided it uses all available sources of financing. A firm can grow by 4 percent without any additional financing of any kind. A firm can grow by 4 percent annually without increasing its probability of incurring financial distress. Which one of these best states a requirement found in the definition of crosssectional analysis? Multiple choice question. Ratio comparisons must be made between firms in the same industry. Ratio comparisons must be for a 5-year period of time. Ratio comparisons must be between any two or more firms. Ratio comparisons can only be done if firms have the same capital structure. Select all that apply Which of these is (are) a factor which requires caution when using ratios to evaluate firm performance? Select all that apply. Multiple select question. Firms may use different accounting methods to value inventory. Ratios may be calculated differently by different firms. The future may differ from the past. Firms within an industry that are used in cross-sectional analysis may have only one line of business. [Show Less]
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FIN 3400 Chapter 04 Assignment Questions and Answers- Florida International University
FIN 3400 Chapter 04 Assignment Questions and Answers- Florida International University Susette invested $10,000 twenty years ago. Ten years ago, she inves... [Show More] ted an additional $5,000. Last year, she withdrew $8,000 to pay for a vacation. If you were to draw a time line of these events, which value(s) would be treated as a cash inflow(s) to Susette? Multiple choice question. $8,000 cash withdrawal $10,000 original investment plus $5,000 additional investment $10,000 original investment $5,000 additional investment Louisa invested $12,000 in a business venture which returned $4,000, $6,000, and $8,000 over the past three years. Which of these amounts is (are) cash outflows to Louisa? Multiple choice question. $4,000, $6,000, and $8,000 returns $12,000 investment $4,000 return $8,000 return Four years ago, AB Tools had an extra $500 it did not currently need so the firm deposited the $500 in a new savings account. Three years ago, the firm withdrew $200. Last year, the firm deposited $800 into the account. Today, the account is worth $1,180 and the firm is withdrawing the entire balance. Which statement correctly defines a portion of the time line for the account if the $500 deposit is shown at time zero? Multiple choice question. At year 2, there is a cash outflow of $800. At year 1, there is a cash inflow of $200. At time zero, there is a cash inflow of $500. At year 4, there is a cash outflow of $1,180. Which one of these correctly defines the future value of a $1,000 investment? Multiple choice question. The future value is the value that is obtained by discounting the $1,000 for a stated period of time. Future value is the value of the investment at any date after the initial investment date. Future value is the value of the $1,000 investment at any point in time prior to the date of investment. The initial $1,000 investment is the future value. Five years ago, Alicia invested $10,000 at 5% interest. How much less money would she have today if she had invested the money at 4% instead of 5%? Interest is compounded annually. Multiple choice question. $12,167 $596 $12,763 $1,000 Reason: FV = $10,000 × (1 + 0.05)5 = $14,660.05 FV = $10,000 × (1 + 0.04)5 = $12,763 Difference = $12,167 - $12,763 = -$596 Five years ago, Lewis Equipment purchased equipment costing $212,000. Two years ago, the firm paid $32,000 for updates to that equipment. This year, the firm sold the equipment for $189,000. Which of these cash flows is (are) cash inflows to Lewis Equipment? Multiple choice question. $32,000 updates $189,000 sale price $212,000 original cost plus $32,000 in updates $212,000 original cost How is the future value of $500 invested for one year at 6 percent annual interest computed? Multiple choice question. FV = $500/(1 + 0.06)1 FV = $500 + $500 × (1 + 0.06) FV = $500 × (1 + 0.06)1 FV = $500 × (1.06)12 Which one of these cash flows best illustrates a cash outflow? Multiple choice question. Ernst withdrew $900 from his savings account. Carlton Mills collected $1,200 from the sale of a product. Better Bakery purchased a new oven for $28,600. Paulette received a $100 dividend payment on her stock investment. Which one of these formulas illustrates the compounding of interest? Multiple choice question. $100 × (1 + 0.06) × (1 + 0.06) $100 + $6 + $6 + $6 + $6 $100/(1 + 0.06) $100 × (1 + 0.06) Four years ago, AB Tools had an extra $1100 it did not currently need so the firm deposited the $1100 in a new savings account. Three years ago, the firm withdrew $300. Last year, the firm deposited $800 into the account. Today, the account is worth $1,600 and the firm is withdrawing the entire balance. Which statement correctly defines a portion of the time line for the account if the $500 deposit is shown at time zero? Multiple choice question. At year 4, there is a cash outflow of $1,6600. At year 2, there is a cash outflow of $800. At time zero, there is a cash outflow of $1100. At year 1, there is a cash outflow of $300. How is future value best defined? Multiple choice question. Future value is the amount that a future cash flow is worth today. Future value is the value that an investment made today will be worth sometime in the future. Future value is the value of an investment after one or more periods. Future value is a value that will be reached sometime after today. In the case of simple interest, interest is applied each period to Multiple choice question. interest and principal the principal only the interest only with a compound effect Ten years ago, Alicia invested $9,000 at 5 percent interest. How much more money would she have today if she had invested the money at 6 percent instead of 5 percent? Interest is compounded annually. Multiple choice question. $1,503.13 $1,642.97 $1,457.58 $1,309.18 Reason: FV = $9,000 × (1 + 0.05)10 = $14,660.05 FV = $9,000 × (1 + 0.06)10 = $16,117.63 Difference = $16,117.63 - $14,660.05 = $1,457.58 Today, both Marti and Neil invested $5,000. Marti's investment will return 4 percent while Neil's will return 8 percent. Both rates will be compounded. Which one of these statements is correct? Multiple choice question. Both Marti's and Neil's investment will be worth the same amount after one year. Neil's investment will increase in value faster than Marti's. Marti's investment will increase faster in value than Neil's. Neil's investment will be worth exactly twice as much as Marti's in ten years. Which formula illustrates the value of $100 invested for one year at 5 percent interest? Multiple choice question. FV = $100 × (1 + 0.05) FV = $100/(1 + 0.05) FV = $100 × 10.05 FV = $100 × (0.05)1 This morning, Mal Reynolds invested $1,000 for 40 years. He will earn 15% interest for the first twenty five years and 10% interest for the last fifteen years. How much will his investment be worth 5 years from now? Multiple choice question. $1,000,000 $47,365 $137,511 Unable to be determined Alicia invested $1,000 three years ago at a fixed rate of 5 percent interest. Which one of these illustrates the compounding of interest on this investment? Multiple choice question. Alicia spends her $50 of interest each year as soon as she receives it. Alicia received $50 in interest in years 1, 2, and 3. Alicia's investment was worth $1,050 after one year and $1,102.50 after two years. Alicia withdrew $1,050 two years ago. Select all that apply Solving which of the following problems illustrates discounting? Select all that apply. Multiple select question. If you invest $6,000 today at 5 percent interest, how much will you have 6 years from now? Three years ago, you deposited $1,200 in a savings account that pays 1.5 percent interest. How much is the account worth today? What is a $1,000 gift to be received next year worth today if the interest rate is 5 percent? How much do you need to invest today at 7 percent interest to have $40,000 available for college expenses in 17 years? Four years ago, AB Tools had an extra $500 it did not currently need so the firm deposited the $500 in a new savings account. Three years ago, the firm withdrew $200. Last year, the firm deposited $800 into the account. Today, the account is worth $1,180 and the firm is withdrawing the entire balance. Which statement correctly defines a portion of the time line for the account if the $500 deposit is shown at time zero? Multiple choice question. At time zero, there is a cash inflow of $500. At year 4, there is a cash outflow of $1,180. At year 1, there is a cash inflow of $200. At year 2, there is a cash outflow of $800. Select all that apply $100 represents the present value, as it is used in the present value formula, for which of these problems? Select all that apply. Multiple select question. Janice invested $100 today at 9 percent interest for ten years. Marcus received $100 today from a bond purchased for $50 several years ago. Shawn invested $40 which has increased in value to $100 today. Russ' savings account increased in value from $100 five years ago to $111 today. Which one of the following best illustrates simple interest? Multiple choice question. Ann has a $1,000 savings account that will pay her $40 of interest each year for five years. Alex invested $1,000 and has received $35, $42, $46, and $49 in annual earnings over the past four years. Rita has a savings account that paid her $40, $41, $42, and $43 in interest over the past four years on a $1,000 investment. Ivan invested $1,000 and receives an increasing amount of interest each year even though the interest rate is constant. What is the value today of $2,500 to be received in 7 years if the discount rate is 3.5 percent? Multiple choice question. $2,172.86 $1,964.98 $2,415.46 $3,180.70 Which one of these statements is correct concerning the relationship of i to PV, FV, and N? Multiple choice question. If you increase the interest rate, all else held constant, the time period will increase. If you increase the interest rate, all else held constant, the future value will increase. If you increase the interest rate, all else held constant, the time period will remain constant. If you increase the interest rate, all else held constant, the present value will increase. Which one of these statements is correct concerning the relationship of PV, FV, i, and N? Assume the interest rate is constant and positive. Multiple choice question. All else held constant, the longer the time period, the lower the present value. All else held constant, the longer the time period, the lower the future value. All else held constant, the longer the time period, the higher the interest rate. All else held constant, the shorter the time period, the lower the present value. This morning, Kurt invested $500 for five years. He will earn 3 percent interest for the first two years and 5 percent interest for the last three years. How much will his investment be worth 5 years from now? Multiple choice question. $622.19 $614.06 $598.14 $584.82 You expect to receive a gift of $1,000 three years from today. What is the value of this gift today if the discount rates are 6 percent, 6.5 percent, and 7 percent for the next three years, respectively? Multiple choice question. $827.87 $831.14 $798.19 $808.11 Which term is defined as the process of finding a present value by reducing a future value using the applicable rates of interest? Multiple choice question. Compounding Investing Analyzing Discounting You expect to receive a gift of $5,000 six years from today. Which formula provides the value of this gift two years from today if the discount rate is 9 percent? Multiple choice question. PV = $5,000 × (1 + 0.09)6 PV = $5,000/(1 + 0.09)4 PV = $5,000/(1 + 0.09)6 PV = $5,000 × (1 + 0.09)4 Which one of the following is the correct application of the present value formula for this problem: Maria expects to receive $5,000 from her grandmother upon her graduation in three years. What is the current value of this gift if the interest rate is 4 percent? Multiple choice question. PV = $5,000/(1 + 0.04)3 $5,000 = FV/(1 + 0.04)3 PV = $5,000/(1 + 0.03)4 $5,000 = FV/(1 + 0.03)4 Which formula moves a cash flow of $800 ahead six years in time at an interest rate of 5 percent? Multiple choice question. PV = $800/(1 + 0.05)6 FV = $800 × (1 + 0.06)5 PV = $800/(1 + 0.06)5 FV = $800 × (1 + 0.05)6 A bank loaned money at 7 percent interest for five years to Stu. The loan will be repaid in one lump sum payment of $3,366.12. How much did Stu borrow? Multiple choice question. $2,400 $2,200 $2,100 $2,300 A project has these cash flows: -$2,000 two years ago, $800 one year ago, and $1,200 one year from now. Which is the correct formula for computing today's value of these cash flows given a 6 percent rate of interest? Multiple choice question. Today's value = -$2,000/(1 + 0.06)2 + $800/(1 + 0.06) + $1,200 × (1 + 0.06) Today's value = -$2,000 × (1 + 0.06)2 + $800 × (1 + 0.06) + $1,200/(1 + 0.06) Today's value = -$2,000 + $800/(1 + 0.06) + $1,200/(1 + 0.06)3 Today's value = -$2,000 × (1 + 0.06) + $800 + $1,200/(1 + 0.06)2 Which of these statements is (are) correct? Assume a constant, positive, annual rate of interest. Select all that apply. Multiple select question. The longer the time period, the higher the present value given a stated future value. The shorter the time period, the lower the present value of a stated future value. The shorter the time period, the higher the present value of a stated future value. The longer the time period, the greater the future value of a stated sum. Which of these statements correctly defines the Rule of 72? Multiple choice question. The Rule of 72 provides an approximation of the number of years needed to double your money given a particular rate of interest. The Rule of 72 states that you can double your money in one year if you can earn a rate of return of 72 percent for the year. The Rule of 72 provides an exact number of years needed to double your money if the interest rate is 7.2 percent. The Rule of 72 is the theory that money has a 72 percent probability of doubling in value within a ten-year period. You expect to receive a gift of $1,000 five years from today. What is the value of this gift today if the discount rates are 8% for the next three years and 10% for the next two years? Multiple choice question. $808.11 $656.06 $831.14 $1000.00 Reason: PV = $1,000/[(1 + 0.08)3 × (1 + 0.10)2] = $656.06 Approximately how long will it take a $2,500 investment to grow to $5,000 at an interest rate of 6 percent? Multiple choice question. 8 years 0.08 years 12 years 1.20 years Charity House has been promised a $25,000 donation five years from today. How much would that gift be worth next year? Assume an interest rate of 8 percent. Multiple choice question. PV = $25,000/(1 + 0.08)4 PV = $25,000/(1 + 0.08)5 PV = $25,000 × (1 + 0.08)4 PV = $25,000 × (1 + 0.08)5 Twelve years ago, you invested $4,800. Today, your investment is worth $8,750. What is your rate of return? Multiple choice question. 4.87 percent 13.45 percent 5.13 percent 5.42 percent Which formula computes the value in year 9 of a $10,000 investment in year 2 if the interest rate is 6 percent? Multiple choice question. FV = $10,000 × (1 + 0.06)9 FV = $10,000 × (1 + 0.06)7 PV = $10,000/(1 + 0.06)7 PV = $10,000/(1 + 0.06)9 Sara invested $3,400 six years ago. Today, her investment is worth $4,200. Which formula will correctly compute her rate of return? Multiple choice question. i = ($4,200/$3,400)1/6 - 1 i = ($4,200/$3,400)6 -1 i = [($4,200/$3,400) - 1]1/6 i= ($3,400/$4,200)1/6 A project has these cash flows: $2,000 3 years ago, $1,000 now and -$2,000 three years from now. Which is the correct formula for computing today's value of these cash flows given a 6% rate of interest? Multiple choice question. Today's value = $2,000 × (1 + 0.06)3 + $1,000 × (1 + 0.06)0 - $2,000/(1 + 0.06)3 Today's value = -$2,000 × (1 + 0.06)3 - $1,000 × (1 + 0.06)0 +v $2,000/(1 + 0.06)3 Today's value = $2,000/(1 + 0.06)3 + $1,000 × (1 + 0.06)0 - $2,000 × (1 + 0.06)3 Today's value = $2,000 + $1,000 - $2,000 Two years ago, your investments were worth $11,000. Today, those same investments are only worth $9,800, for an annual loss of 5.61 percent. How do you compute the return needed to increase your investments to $11,000 in the next two years? Multiple choice question. i= ($11,000/$9,800)1/2 - 1 i = ($11,000 - $9,800)/2 i = ($9,800/$11,000)2 + 1 i = ($11,000 - $9,800)1/2 -1 Which one of these formulas correctly defines the Rule of 72? Multiple choice question. Approximate number of years to double money × Interest rate = 72 Interest rate × 72 = Approximate number of years to double money Approximate number of years to double money/72 = Interest rate Interest rate × Exact number of years to double money = 72 How long will it take to double a $2,000 investment at 10% interest Multiple choice question. 14.54 years 7.00 years 7.27 years 10 years How long will it take to increase a $2,200 investment to $10,000 if the interest rate is 6.5 percent? Multiple choice question. 19.67 years 24.04 years 27.22 years 15.59 years Reason: Using a financial calculator: I = 6.5; PV = -2,200; PMT = 0; FV = 10,000 If you want to double your money in five years, what is the approximate annual rate of return you must earn using the Rule of 72? Multiple choice question. 14.4 percent 3.6 percent 6.9 percent 12.0 percent Ten years ago, you put $5,000 in a savings account. Today, your investment has the purchasing power of $4,800 What is your real rate of return? (just calculate like a normal interest rate) Multiple choice question. 4.000% -0.41% -4.00% -4.17% Which of these is the correct formula for computing the interest rate on an investment? Multiple choice question. i = (FVN/PV)1/N i = (FVN/PV)N - 1 i = (FVN/PV)1/N - 1 i = (FVN/PV)N You invested $1,000 and lost 21 percent of that value during the first year. Which formula computes the rate needed to increase your investment back to $1,000 by the end of the second year? Multiple choice question. i = $1,000/[$1,000 × (1 - 0.021)] i ={[$1,000 × (1 - 0.21)]/$1,000}1/1 - 1 i = $1,000/[$1,000 × (1 - 0.21)]1/1 - 1 i = $1,000/[$1,000 × (1 - 0.21)1/2 -1 [Show Less]
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FIN 3400 Chapter 05 Assignment Questions and Answers- Florida International University
FIN 3400 Chapter 05 Assignment Questions and Answers- Florida International University You plan to invest $300 today and $500 three years from today. Two ... [Show More] years from today, you plan to withdraw $50. Which of these is a correct statement regarding a time line for computing the future value of your cash flows four years from today? Multiple choice question. The cash flow at year 4 is a negative $500. The cash flow at time 0 is a positive $300. The cash flow at year 2 is a negative $50. The cash flow at year 3 is a negative $500. True or false: Time has a greater impact on a future value than the interest rate. True false question. True False Stu deposited $400 in an account three years ago. Last year, he deposited $250 and plans to deposit $300 next year. The rate is 3 percent. Which one of these correctly states a portion of the formula needed to compute the future value five years from today? Multiple choice question. $250 × 1.036 $400 × 1.037 $400 × 1.035 $300 / 1.034 How is an ordinary annuity defined? Multiple choice question. An ordinary annuity is a stream of unequal cash flows which occur at the end of every time period. An ordinary annuity is a stream of equal cash flows paid at the end of every time period. An ordinary annuity is a series of level and equal cash flows paid at the beginning of every time period. An ordinary annuity is a series of equal cash flows that occur at random times. You want to compute the future value of a 20-year ordinary annuity that pays 7 percent interest. Which one of these correctly represents the annuity compounding factor that should be used in the FVAN equation? Multiple choice question. [(1.07)20 - 1]/0.07 (1.07)20 [(1.07) - 1]/0.07 (1.07)20/0.07 Tory invested $600 a year for three years, then $700 a year for an additional four years. In year 9, she withdrew $1,500. She withdrew the entire investment in year 11. Which statement correctly applies to the time line for this problem? Multiple choice question. The withdrawal in year 11 is a negative cash flow. The time line has a total of nine time periods. The cash flow in year 4 is a negative $600. The cash flows for the first seven years are negative. Which one of these correctly summarizes the future value formula? Assume the interest rate is positive. Multiple choice question. The lower the interest rate, the greater the future value, all else held constant. The higher the present value, the lower the future value, all else held constant. The greater the number of time periods, the higher the future value, all else held constant. The higher the interest rate, the lower the future value, all else held constant. You have decided to invest for 20 years. You start with $200 a year and plan to increase that amount every three years by an additional $100 a year with the first increase occurring in Year 4. You create a multiple annuity future value time line. What cash flows will appear at Year 7 on the annuity time line? Multiple choice question. Year 7 will have three cash flows in the amounts of -$200, -$100, and - $100. Year 7 will have one cash outflow of -$100. Year 7 will have one cash outflow of -$400. Year 7 will have two cash flows in the amounts of -$200 and -$100. Two years ago, Margo deposited $500 into a savings account. One year ago, she deposited an additional $300, and today she deposited $800. Which one of these is these is the correct formula for computing the value of these deposits today at a rate of 4 percent? Multiple choice question. PV2 = ($500/1.042) + ($300/1.04) + $800 FV2 = ($500 × 1.04) + $300 + $800/1.04 FV2 = ($500 × 1.043) + ($300 × 1.042) + ($800 × 1.04) FV2 = ($500 × 1.042) + ($300 × 1.04) + $800 True or false: A cash outflow three years from now will appear as a positive value at Year 3 on a present value time line. Assume today is Time 0. True false question. True False Which one of these sets of cash flows fits the description of an ordinary annuity? Multiple choice question. Rent on an apartment with the first payment due on the date you move in and subsequent payments due every month thereafter Car payments of $240 a month for four years with the first payment due one month after the loan is obtained Commission earnings that are paid monthly but vary in amount Credit card payments that are paid monthly and equal the amount spent each month Chris plans on saving $4,000 a year at 4 percent interest for five years. Which one of these is the correct formula for computing the future value at Year 5 of these savings? Assume the payments occur at the end of each year. Multiple choice question. FV5 = $4,000 × 1.045 FV5 = $4,000 × [(1.04 - 1)5 /0.04] FV5 = $4,000 × [(1.045 -1)/0.04] FV5 = $4,000 × [(1.045 -1)/.04] × (1.04) True or false: The lower the interest rate, the lower the present value of a set of multiple future cash flows, all else held constant. True false question. True False You plan to invest $300 today and $500 three years from today. Two years from today, you plan to withdraw $50. Which of these is a correct statement regarding a time line for computing the future value of your cash flows four years from today? Multiple choice question. The cash flow at time 0 is a positive $300. The cash flow at year 4 is a negative $500. The cash flow at year 2 is a negative $50. The cash flow at year 3 is a negative $500. You expect to receive $800 next year, $400 three years from now, and $500 four years from now. Which one of these formulas will correctly compute the present value as of today at 5 percent interest? Multiple choice question. PV = $800/1.05 + $400/1.052 + $500/1.053 PV = $800 + $400/1.052 + $500/1.053 PV = $800/1.05 + $400/1.054 + $500/1.055 PV = $800/1.05 + $400/1.053 + $500/1.054 You have decided to save $500 a year for the next five years and then increase that amount to $700 a year for the following five years. Which one of these correctly reflects a multiple annuity time line for the future value of your savings? Multiple choice question. The time line will have a +$500 cash flow for Years 1 - 10 and an additional +$200 cash flow for Years 6 - 10. The time line will have a -$700 cash flow for Years 1 - 5 and a -$500 cash flow for Years 6-10. The time line will have a -$500 cash flow for Years 1 - 10 and an additional -$200 cash flow for Years 6 - 10. The time line will have a +$500 cash flow for Years 1 - 5 and a +$700 cash flow for Years 6 - 10. An investment will pay $400 a year for 25 years. What is the correct formula to compute the present value of these payments at a rate of 5 percent? Multiple choice question. $400/1.0525 $400 × {[1 - (1/1.0525)]/0.05} $400/[(1.0525)/0.05] $400 × [(1.0525 - 1)/0.05] You expect to receive the following annual cash flows starting at Year 1: $800, $500, $900, and $600. To develop a time line, what will the cash flow for Year 3 be? Multiple choice question. +$600 -$900 -$600 +$900 Art's Market borrows $25,000 for three years at 8 percent. Payments are quarterly. Which of these inputs correctly computes the payment amount? Multiple choice question. N = 4; I = 8/4; PV = 25,000; FV = 0; CPT PMT N = 12; I = 8/4; PV = 25,000; FV = 0; CPT PMT N = 12; I = 8/3; PV = 25,000; FV = 0; CPT PMT N = 12; I = 8/4; PV = 0; FV = 25,000; CPT PMT You borrow $10,000 for four years to buy a car. The monthly loan payment is $237.15. If you draw a time line, what is the cash flow at Time 0? Multiple choice question. +$10,000 $11,383.20 -$10,000 $0 Which one of these statements is correct regarding the present value of multiple cash flows formula? Assume a positive interest rate. Multiple choice question. The greater the number of future values, the lower the present value, all else held constant. The lower the interest rate, the lower the present value, all else held constant. The higher the interest rate, the lower the present value, all else held constant. The greater the future values, the lower the present value, all else held constant. Lester's rented some equipment at a cost of $800 for Years 1 through 3 and $900 for Years 4 and 5. Which of these correctly depicts a portion of the present value of multiple annuities time line? Multiple choice question. Year 4 has two cash flows in the amounts of $800 and $100. Year 1 has one cash flow in the amount of $800. Year 1 has two cash flows in the amounts of -$900 and $100. Year 3 has one cash flow in the amount of -$800. You just won a prize that will pay you $800 today and $500 a year for the next three years. Which is the correct formula for computing the present value as of today at 6 percent? Multiple choice question. PV = $800(1.06) + $500 + $500/1.06 + $500/1.062 PV = $800 + $500/1.062 + $500/1.063 + $500/1.064 PV = $800 + $500/1.06 + $500/1.062+ $500/1.063 PV = $800/1.06 + $500/1.062 + $500/1.063 + $500/1.064 Les sold some equipment and will receive annual payments of $400 for two years and $350 for the following two years. Which is the correct present value of multiple annuities formula given a rate of 9 percent? Multiple choice question. $350 × {[1 - (1/1.094)]/0.09} - $50 × {[1 - (1/1.092)]/0.09} $400 × {[1 - (1/1.094)]/0.09} - $50 × {[1 - (1/1.092)]/0.09 $350/1.094 + $50/1.092 $350 × {[1 - (1/1.094)]/0.09} + $50 × {[1 - (1/1.092)]/0.09} An annuity pays a rate of 8 percent and has a life of 12 years. Which of these is the correct annuity discount factor for computing a present value of this annuity? Multiple choice question. [1 - (1/1.0812)]/0.08 (1/1.0812)/0.08 1.0812/0.08 (1.0812 - 1)/0.08 What is the difference between an annuity and a perpetuity? Multiple choice question. A perpetuity is an annuity with payments that increase as time progresses. An annuity has a fixed number of cash flows while a perpetuity has unending cash flows. A perpetuity is an annuity with steadily decreasing cash flows. A perpetuity is an annuity with a set number of cash flows. Justine pays $200 a month for five years at 6 percent interest. Which of these is the correct input for determining the amount borrowed? Multiple choice question. N = 12; I = 6/12; PV = 0; PMT = -200; CPT FV N = 60; I = 6/12; PV = -200; FV = 0; CPT PMT N = 5; I = 6; PMT = -2,400; FV = 0, CPT PV N = 60; I = 6/12; PMT = -200; FV = 0; CPT PV Which one of these illustrates a perpetuity? Multiple choice question. Payments of $100 a year for the next 100 years Payments of $25 a year for the next 16 years Payments that never end but vary in amount from year to year Payments of $50 a quarter from now until forever You sell some equipment for $8,000 and agree to accept annual payments of $2,469.35 for four years. If you draw a time line, what is the cash flow for Year 4? Multiple choice question. -$2,469.35 $8,000 +$2,469.35 $0 Which one of these best defines an annuity due? Multiple choice question. An annuity due is a stream of unending, equal payments that are paid at equal intervals of time. An annuity due is a stream of equal payments with each payment occurring at the end of a set number of equal time intervals. An annuity due is a stream of equal payments paid at the beginning of each equal time interval for a set number of time periods. An annuity due is a set of unending payments that are paid over equal intervals of time. You expect to receive $600 in Years 1 through 5, $700 in Years 6 through 8, and $400 in Years 9 and 10. What cash flow(s) will appear on a present value of multiple annuities time line for Year 10? Multiple choice question. Year 10 has three cash flows in the amounts of $700, -$100, and -$300. Year 10 has one cash inflow in the amount of $400. Year 10 has three cash flows in the amounts of $600, $100, and -$300. Year 10 has three cash flows in the amounts of $600, $100, and $300. How do you convert an ordinary annuity present value formula to an annuity due present value formula? Multiple choice question. Divide the ordinary annuity present value by (1 + i) Multiply the ordinary annuity present value by (1 + i) Subtract (1 + i) from the ordinary annuity present value Add (1 + i) to the ordinary annuity present value You expect to receive annual gifts of $1,000 at the end of Years 1 and 2 and $1,500 at the end of Years 3 and 4. Which of these is the correct present value of multiple annuities formula if the rate is 6 percent? Multiple choice question. $1,500 × {[1 - (1/1.062)]/0.06 + $1,000 × {[1 - (1/1.062)]/0.06} $1,000 × {[1 - (1/1.062)]/0.06} + $500 × {[1 - (1/1.064)]/0.06} $1,500 × {[1 - (1/1.064)]/0.06} - $500 × {[1 - (1/1.062)]/0.06} $1,000 × {[1 - (1/1.064)]/0.06} + $500 ×{[1 - (1/1.062)]/0.06} An investment pays an annual rate of 9 percent with interest payments occurring quarterly. How many times per year is the interest compounded? Multiple choice question. 4 times 1 time 2 times 3 times What is a perpetuity? Multiple choice question. A perpetuity is a stream of unequal payments that are received forever. A perpetuity is an unending stream of equal payments occurring at equal intervals of time. A perpetuity is an annuity with a life less than 10 years. A perpetuity is a type of annuity that has payments which occur at the beginning of a set number of time periods. Which one of these illustrates a perpetuity? Multiple choice question. Preferred stock which pays a $60 annual dividend An investment that pays $100 the first year and increases that amount by $5 each year for the next seven years 20-year bond that pays $50 every six months Investment that pays $1,000 a month for five years You can afford monthly car payments of $150 for five years at 7 percent. How do you compute the amount you can borrow? Multiple choice question. N = 60; I = 7/12; PMT = -150; PV = 0; CPT FV N = 60; I = 7; PMT = -150; FV = 0; CPT PV N = 60; I = 7/12; PMT = -150; FV = 0; CPT PV N = 5; I = 7/12; PMT = -150; FV = 0; CPT PV Which one of these payment streams fits the definition of an annuity due? Multiple choice question. A prize pays $1,000 a year for ten years, starting today. A preferred stock pays a $2 quarterly dividend. A 4-year car loan requires the last monthly payment be paid at the end of Year 4. A 20-year bond pays semiannual interest with the first payment occurring six months after issuance. Bro is buying $35,000 to buy a new car; how much can are his interest payments if the rate is 3.5% over three years? Multiple choice question. $2,187.42 $1,025.57 $1,000.00 $454.34 Which one of these correctly converts an ordinary future value annuity formula into an annuity due future value formula? Multiple choice question. FVAN due = FVAN + (1 + i) FVAN = FVAN due × (1 + i) FVAN due = FVAN × (1 + i) FVAN due = FVAN/(1 + i) How many times per year is interest compounded on a debt that requires monthly payments? Multiple choice question. 1 time 2 times 12 times 4 times A credit card charges an interest rate of one percent per month. Define the annual percentage rate (APR) for this debt. Multiple choice question. The APR is equal to one percent per month multiplied by 12 months per year. The APR is equal to (1 + 0.01)12 - 1. The APR is equal to one percent raised to the 12th power. The APR is one percent. Identify a true statement about the effective annual rate. Multiple choice question. An effective annual rate is higher than annual percentage rate if compounding of interest happens more than once in a year. An effective annual rate is the rate per period times the number of periods per year. An effective annual rate is always the stated rate on a loan. An effective annual rate is the rate which excludes any interest rate compounding. An investment pays quarterly payments and has an APR of 8 percent. You need to compute the future value at Year 3. What is the calculator input for the interest rate? Multiple choice question. I = 8/12 I = 8/4 I = 8 × 4 I = 8/3 You borrow money for two years at 1.25 percent per month. How is the effective annual rate (EAR) computed? Multiple choice question. EAR = [1 + (0.0125 × 12)12 - 1 EAR = (1 + 0.0125)24 - 1 EAR = (1 + 0.0125)12 - 1 EAR = [1 + (0.0125/12)]12 -1 Sis can afford monthly car payments of $180 for three years. How much can she borrow if the rate is 7 percent? Multiple choice question. $2,346.34 $7,187.42 $6,480.00 $5,829.56 A loan charges an APR of 11 percent with payments made quarterly. How is the EAR computed? Multiple choice question. EAR = (0.11/4)4 EAR = (1 + 0.11)4 -1 EAR = [1 + (0.11/4)]4 - 1 EAR = (0.11/4) × 4 How do you convert an ordinary annuity present value formula to an annuity due present value formula? Multiple choice question. Add (1 + i) to the ordinary annuity present value Subtract (1 + i) from the ordinary annuity present value Multiply the ordinary annuity present value by (1 + i) Divide the ordinary annuity present value by (1 + i) What is the effective annual rate of a 6 percent APR compounded daily? Multiple choice question. 6.09 percent 6.18 percent 6.13 percent 6.17 percent How is the annual percentage rate (APR) defined? Multiple choice question. An APR is the interest rate per period times the number of periods per year. An APR is the interest rate charged per month on a monthly payment loan. An APR is the interest rate that includes any interest earned on reinvested interest. An APR is the interest rate that reflects annualizing with compounding figured in. You are comparing four loans with the following rates. Which loan offers the best interest rate for the borrower? Multiple choice question. 6.1 percent, compounded quarterly 6 percent, compounded monthly 6.15 percent APR, compounded annually 6.25 percent, compounded semiannually Which one of these formulas correctly defines an effective annual rate (EAR) for any compounding period? Multiple choice question. EAR = (1 + APR)Number of periods per year - 1 EAR = (1 + Rate per period)Number of periods per year - 1. EAR = Rate per periodNumber of periods per year EAR = Rate per period × Number of periods per year Which statement correctly applies to this monthly loan payment calculation? PMT360 = $145,000 × {0.005/[1 - 1/(1 + 0.005)360]} = $869.35 Multiple choice question. The APR is 6 percent. This is a 36-year loan. The amount borrowed equals 360 × $869.35. The annual interest rate is 0.5 percent. A 3-year investment pays 5 percent annual interest with semiannual interest payments. How is the EAR computed? Multiple choice question. EAR = [1 + (0.05/2)]2 - 1 EAR = [1 + (0.05/2)6 - 1 EAR = (0.05/2)2 EAR = (1 + 0.05)2 - 1 You just borrowed money for four years to buy a car. The payments are $218 a month and the APR is 7 percent. How is the EAR computed? Multiple choice question. EAR = [1 + (0.07/48)12 - 1] EAR = [1 + (0.07/4)4 - 1] EAR = [1 + (0.07/12)48 - 1] EAR = [1 + (0.07/12)12 - 1] You take out a $120,000 mortgage for 30 years at 4% interest. How much of your first payment applies to the principal balance? Multiple choice question. $400.00 $172.90 $399.49 $173.48 Assume the answers provided are the effective annual rates with annual, semiannual, quarterly, and monthly compounding of the identical APR. Which rate must be the monthly EAR? (No computations are required.) Multiple choice question. 7.529 7.576 7.325 7.459 What is an amortization schedule? Multiple choice question. An amortization schedule is a list limited to showing the amount of principal that is due on a loan at any point in time. An amortization schedule is a legal document which shows the amount borrowed, fees incurred, and interest charges. An amortization schedule shows the interest and principal portions of each payment, as well as the loan balance after each payment. An amortization consists of three columns, total payment, interest paid, and principal paid. You are comparing four loans with the following rates. Which loan offers the best interest rate for the borrower? Multiple choice question. 4.9% compounded monthly 5% compounded quarterly 5% APR, compounded annually 5% compounded semiannually A 6 percent, $11,500 car loan requires monthly payments. What rate should be used in the calculator input to determine the number of periods until the loan is repaid in full? Multiple choice question. 3 percent 1.5 percent 0.5 percent 6 percent You borrow $18,000 for four years to buy a car. The APR is 8 percent. What rate should be used when you compute the monthly payment? Multiple choice question. 2.00 percent 0.67 percent 8.00 percent 0.17 percent You pay $366.09 a month on your mortgage. The interest rate is 5 percent and the remaining principal balance is $9,656.21. How long will it be until your mortgage is paid off? Multiple choice question. 28 years 28 months 26 months 26 years Which one of these loans meets the definition of an add-on interest loan? Multiple choice question. Scott's loan requires annual payments equal to the annual interest with all principal repaid at maturity. Anna's loan computes the monthly interest based on the unpaid principal balance. Ruth borrowed $2,000 which equaled the initial principal balance. Leo borrowed $1,000 at 10 percent for one year. The initial principal loan balance was computed as $1,000 + $100 = $1,100. You take out a $120,000 mortgage for 30 years at 4 percent interest. The monthly payment is $572.90. How much of your second payment applies to the principal balance? Multiple choice question. $172.90 $400.00 $173.48 $399.49 A 12-month add-on interest loan has monthly payments of $220 and an interest rate of 5 percent. How do you compute the amount borrowed? Multiple choice question. Amount borrowed = (12 × $220) × (1 + 0.05) Amount borrowed = (12 × $220)/0.05 Amount borrowed = 12 × $220 Amount borrowed = (12 × $220)/(1 + 0.05) What is the table called which lists the amount of each loan payment, the interest and principal portions of each payment, and the remaining principal balance? Multiple choice question. Amortization schedule Prospectus Promissory note Depreciation schedule You borrowed $16,000 at 8 percent with semiannual payments of $707.23. What is the correct calculator input to compute the time period? Multiple choice question. I = 8/2; PV = 16,000; PMT = -707.23; FV = 0; CPT N, which is the number of semiannual periods I = 8/2; PV = 16,000; PMT = -707.23; FV = 0; CPT N, which is the number of years I = 8/2; PV = 0; PMT = -707.23; FV = 16,000; CPT N, which is the number of semiannual periods I = 8; PV = 16,000; PMT = -707.23 × 2; FV = 0; CPT N, which is the number of years A $24,000 loan has an interest rate of 9.5 percent and quarterly payments of $936.05. How many years will it take to repay this loan? Multiple choice question. 6.4 years 12.8 years 10 years 40 years Which type of loan computes the amount of interest at the beginning of the loan by applying the interest rate to the amount borrowed and includes that interest in the loan principal? Multiple choice question. Monthly payment loan Interest-only loan Add-on interest loan Amortized loan You borrow $500 at 10 percent for one year. The loan is an add-on interest loan. Which one of these provides the correct calculation to determine the monthly payment? Multiple choice question. [$500 + (0.10 × $500)]/12 N = 12; I = 10/12; PV = 500, FV = 0; CPT PMT $500/12 $500 + {[($500 + $0)/2] × 0.10}/12 [Show Less]
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FIN 3400 Chapter 06 Assignment Questions and Answers- Florida International University
FIN 3400 Chapter 06 Assignment Questions and Answers- Florida International University How is a primary market defined? Multiple choice question. A prim... [Show More] ary market is the market in which a handful of institutions purchase an entire issue of securities. A primary market is the sale of any security that has been registered with the SEC. A primary market is a market in which corporations and other fund demanders obtain funds by issuing new securities. The primary market is defined as the market where only IPOs can occur. What key role does an investment bank play? Multiple choice question. Investment banks serve as an intermediary between the issuer of a security and the underwriter of that security. Investment banks maintain a liquid secondary securities market. Investment banks arrange primary market transactions for business entities. Investment banks purchase all private placements. How many initial public offerings can a corporation issue? Multiple choice question. Maximum of ten One Two; one for bonds and one for stocks Unlimited Select all that apply Which of these fits the definition of a secondary market transaction? Select all that apply. Multiple select question. The Bolt Co. purchased 300 shares of Metals, Inc. stock in an IPO. The Feel Good Co. sold 500 shares of ABC, Inc. to The Better Health Co. The Excel Co. sold 1,000 shares of its stock to Fred Stone. Martha sold 100 shares of stock to her son. Select all that apply The sale of which of these securities matches the definition of a money market transaction? Select all that apply. Multiple select question. 6-month U. S. Treasury security 90-day U. S. Treasury bill 5-year corporate bond 2-year U. S. Treasury note True or false: The issuer of the security will receive the proceeds of a security's sale if that sale occurs in the primary market. True false question. True False Which one of these sets of characteristics applies to money market securities? Multiple choice question. Short-term, low price volatility, high risk High risk, high price volatility, long-term Short-term, low risk, high price volatility Low risk, low price volatility, short-term Which one of these best defines the role of investment banks? Multiple choice question. Investment banks are the primary suppliers of mortgage funds. Investment banks are financial intermediaries between demanders and suppliers of funds. Investment banks are the primary suppliers of funds. Investment banks are the primary demanders of funds. Which money market security involves a sale, generally at a discounted price, that includes a promise to reverse the sale at a specified price on a specified date? Multiple choice question. Banker's acceptance (BA) Repurchase agreement (repo) Treasury bill Negotiable certificate of deposit What is the definition of an initial public offering (IPO)? Multiple choice question. An IPO is the first offering of financial securities by a firm to the general public. An IPO is any sale of newly issued securities by a firm to the general public. An IPO is any sale of securities by a firm in the primary market. An IPO is any sale of newly issued securities by a corporation. True or false: Capital markets are defined by the type of securities traded rather than the maturity of those securities. True false question. True False Select all that apply Which of these defines a secondary market? Select all that apply. Multiple select question. A secondary market is a market in which the seller is also the issuer. A secondary market is a market where previously issued securities are traded. The secondary market refers to all security transactions that involve individual investors. The secondary market involves the resale of a stock by a shareholder. Which one of these is the best definition of foreign exchange markets? Multiple choice question. Foreign exchange markets are markets in which foreign currency is traded for immediate or future delivery. Foreign exchange markets are markets outside of the U. S. in which financial transactions occur. Foreign exchange markets are markets in which foreign currency is traded for immediate delivery. Foreign exchange markets are markets in which agreements are made for goods to be imported from or exported to non-U. S. firms. What is the definition of a money market? Multiple choice question. A money market is a market that trades securities that mature in one year or less. A money market is a security where the funds are invested solely in cash. A money market is a market that trades newly issued securities where the issuer is also the seller. A money market is a market where securities are traded for cash. Select all that apply Which of these parties are affected by foreign exchange risk? Select all that apply. Multiple select question. Individual who invests in overseas markets U. S. importer of clothing from Asia U. S. exporter of goods to Canada New Englander exporter of fish to Iowa Which one of these characteristics applies to money market securities? Multiple choice question. High level of risk Issued solely by the U. S. Treasury Potentially large fluctuations in value Short maturities Select all that apply Which of the following affect the dollar-yuan exchange rate? Select all that apply. Multiple select question. Demand for and supply of Chinese yuan Demand for and supply of Mexican pesos Chinese government intervention Demand for and supply of U. S. dollars Which money market security is defined as short-term funds transferred between financial institutions, often for no more than one day? Multiple choice question. Commercial paper Negotiable certificates of deposit Banker's acceptances Federal funds Which one of these is a characteristic of a derivative security? Multiple choice question. Risk-free security Informal agreement Price of asset exchanged determined when exchange occurs Value dependent on underlying security What is the definition of a capital market? Multiple choice question. A capital market is a market that trades securities with maturities in excess of one year. A capital market is a market that trades only securities issued by governmental entities. A capital market is a market that deals only with primary issues. A capital market is a market that trades securities amongst financial institutions. Select all that apply Multiple select question. Hedging a position to lock in the price of cotton Hedging a position to lock in an interest rate Hedging a position to lock in a dollar/peso exchange rate Hedging a position to lock in the price of corn According to the definition of a foreign exchange market, what good or commodity is exchanged in these markets? Multiple choice question. Foreign-produced goods Domestic-produced Foreign currency only Foreign services Which one of the following terms best defines the role of a financial institution? Multiple choice question. Direct lender Market analyst Market regulator Financial intermediary A firm produces goods in the U. S. and receives euros in Germany when the goods are sold. Which particular aspect of this firm's operations exposes the firm to foreign exchange risk? Multiple choice question. Paying German salesmen in euros Paying American workers in dollars Converting the euros into dollars Paying American suppliers in dollars Which one of the following is a key factor that makes direct investments unpopular with investors? Multiple choice question. Financial intermediary costs Costs of holding cash Monitoring costs Banker's fees True or false: U. S. interest rates can affect all exchange rates involving U. S. dollars. True false question. True False The risk that an asset's value may be less than its purchase price is referred to as which type of risk? Multiple choice question. Liquidity risk Inflation risk Default risk Price risk Which set of characteristics best applies to a derivative security agreement? Multiple choice question. Standardized quantity, predetermined price of exchanged asset, specified exchange date, high degree of leverage Variable quantity, specified price of exchanged asset,and specified exchange date, high degree of leverage Variable quantity, predetermined price of exchanged asset, variable exchange date, low degree of leverage Standardized quantity, unspecified price of exchanged asset, and unspecified exchange date, low degree of leverage. Which term is used to designate an economic agent appointed to act on behalf of smaller investors in collecting information? Multiple choice question. Asset transformer Free agent Delegated monitor Security issuer Which one of the following parties is most apt to hedge a position to lock in the price at which they can sell milk in the future? Multiple choice question. Dairy farmer Ice cream maker Cheese producer Retail grocer Which one of these is a common feature of a secondary security as compared to the primary claim? Multiple choice question. Less attractive to investors Increased liquidity Decreased marketability Less accessibility to funds What is the primary function of financial institutions? Multiple choice question. Issuing securities Spreading risk among market participants Creating and distributing derivative securities Channeling funds from those with surplus funds to those who need funds Which one of these defines an asset transformer? Multiple choice question. A financial institution that issues primary equity securities A financial institution which issues secondary securities to investors A corporation that repurchases outstanding shares of stock An economic agent appointed to act on behalf of investors Select all that apply Which three of the following are key factors that limit direct investment in financial claims? Select three. Multiple select question. Price risk Liquidity costs Monitoring costs Inflation risk Select all that apply Which of the following contributed to the mortgage crisis in the late 2000s? Select all that apply. Multiple select question. Non-participation by financial intermediaries Delinquent mortgages Derivative securities Declining housing values Which one of these price changes meets the definition of price risk? Multiple choice question. Audry purchased a building for $267,000. That building is still worth $267,000. Willis purchased a lot for $120,000. That lot is now worth $89,000. Jamie purchased a store for $389,000. That store is now worth $415,000. Theo purchased land for $539,000 and later sold it for $541,000. What is a nominal interest rate? Multiple choice question. A nominal interest rate is the rate on a default-free loan minus the inflation premium. A nominal interest rate is the base rate excluding inflation, default risk, and liquidity risk. A nominal interest rate is the market rate of interest minus the inflation premium. A nominal interest rate is the rate observed in the financial markets. Anna withdrew funds from her bank and purchased 500 shares of ABC stock at the recommendation of her broker. Which one of these parties meets the definition of a delegated monitor? Multiple choice question. ABC Company Anna's broker Anna's bank Anna The largest supplier of loanable funds in the United States is Multiple choice question. U.S. banks Corporate investments The household sector Which one of these statements is correct? Multiple choice question. Secondary securities represent direct transfers of funds. Secondary securities are additional offerings of stock issued by corporations. Secondary securities tend to be more liquid than primary securities. Secondary securities are primarily owned by financial institutions. The United States government is a large borrower - partly to finance past deficits. The national debt, as of 2018, is Multiple choice question. $21.05 trillion $32.05 trillion $2.05 trillion $5.02 trillion The Corner Bank packaged a pool of home mortgages and sold mortgagebacked securities to the Uptown Insurance Co. to fund the monies loaned to the home owners. Which party(ies) meet the definition of asset transformer? Multiple choice question. Uptown Insurance Co. Corner Bank and Uptown Insurance Co. Homeowners with Corner Bank mortgages Corner Bank only Select all that apply Which of the following are specific factors that affect nominal interest rates? Select all that apply. Multiple select question. Liquidity risk Term to maturity Default risk Exchange rate risk Which category of mortgages presented the most problems during the financial crisis of the late 2000s? Multiple choice question. Subprime mortgages Business mortgages Prime mortgages Commercial mortgages Which one of these terms best describes the relationship between the rate of inflation and the rate of interest? Multiple choice question. Indirect relationship No relationship Direct relationship Exponential relationship Which one of these is the definition of a nominal interest rate? Multiple choice question. A nominal interest rate is the rate of interest which excludes any special provisions. A nominal interest rate is the rate of interest that excludes all risk premiums. A nominal interest rate is the rate of interest that excludes the inflation premium. A nominal interest rate is the rate of interest that includes all risk premiums. Which one of these is the definition of a real risk-free rate? Multiple choice question. Interest rate that reflects annualizing with compounding figured in Continual increase in the price level of a basket of goods Interest rate actually observed in financial markets Rate that would exist on a default-free security if no inflation were expected Generally, the quantity of loanable funds supplied increases as interest rates (rise/fall). What is the best definition of default risk? Multiple choice question. Default risk is defined as paying off a loan prior to maturity to avoid incurring future interest. Default risk is defined as non-repayment of the principal value of a loan. Default risk is the potential for an issuer to never pay the interest or principal payments on a debt security. Default risk is the possibility that an issuer may pay late or miss an interest or principal payment. rise True or false: In general, the quantity of loanable funds demanded drops as interest rates fall. True false question. True False Which one of these best defines liquidity risk? Multiple choice question. Liquidity risk is the possibility that an asset will sell immediately at fair market value. Liquidity risk is the possibility that an asset's price must be lowered below fair market value in order to sell the asset on short notice. Liquidity risk is the risk that an issuer will repay a security prior to the original maturity date. Liquidity risk is the risk that a security issuer will have insufficient funds to make timely payments. Which of these factors affecting nominal rates is the risk that a security cannot be sold quickly at full value? Multiple choice question. Inflation risk Special provision Liquidity risk Default risk Which of these is the special provision that grants an issuer the right to retire a security prior to maturity? Multiple choice question. Exchange provision Convertibility Term structure Call option How will an expected increase in the rate of inflation affect interest rates? Multiple choice question. Interest rates will decrease. Interest rates will change but the direction of the change is unpredictable. Interest rates will remain unchanged. Interest rates will increase. The term structure of interest rates compares similar bonds based on which variable? Multiple choice question. Time to maturity Degree of liquidity Taxability provision Level of default risk What is the definition of a real interest rate? Multiple choice question. A real interest rate is the rate that would exist on a default-free security if no inflation were expected. A real interest rate is the rate designated as (i) in the Fisher effect formula. A real interest rate is the rate an investor actually earns on an investment. A real interest rate is the guaranteed rate that a bank pays on a certificate of deposit Which one of the following best explains the concept of the unbiased expectations theory? Multiple choice question. The current yield curve is the market's expectations of current and future long-term rates. Current long-term interest rates are arithmetic averages of current and future expected short-term rates. Current long-term interest rates are geometric averages of current and future expected short-term rates. The long term N-year rate is simply the current 1-year rate raised to the Nth power. Default risk is the risk associated with either late or missed payments on which of these securities? Multiple choice question. Preferred stock only Treasury bonds only Bonds only Bonds and preferred stock What can you determine with certainty about an upward-sloping yield curve according to the liquidity premium theory? Multiple choice question. Future 1-year rates will be higher than today's 1-year rate Future 1-year rates will be lower than today's 1-year rate Longer-term rates are higher than shorter-term rates today Future 1-year rates will be the same as today's 1-year rate Select all that apply To minimize liquidity risk which three factors must exist? Select three. Multiple select question. Low transaction costs Predictable sale price Sale at a reasonable profit Sale on short notice Which one of these statements correctly applies to the market segmentation theory? Multiple choice question. Individual investors prefer longer-term securities and must be compensated to switch to shorter-term securities. The maturity preferences of individual investors are directly offset by the maturity preferences of financial intermediaries (FIs). Financial intermediaries (FIs) are neutral in respect to security maturities. Each individual investor has a preferred maturity based on his or her own financial situation. Which type of bond will generally pay the lowest rate of interest based on its taxability provision? Multiple choice question. U. S. Treasury note Corporate bond U. S. Treasury bond Municipal bond What is a forward rate? Multiple choice question. A forward rate is a real rate of interest that has been adjusted for inflation. A forward rate is an implied rate on a short-term security that will originate sometime in the future. A forward rate is a real rate that has been adjusted for all the risks associated with an individual security j. A forward rate is a rate on a security that will mature sometime in the future. The term structure of interest rates is derived from which one of these? Multiple choice question. Default risk concept Consumer price index Time value of money Fisher effect Which one of these is a basic premise of the unbiased expectations theory? Multiple choice question. The current yield curve must be flat for the market to be in equilibrium. Interest rates balance the expected demand and supply for securities of varying maturities. Long-term rates must exceed short-term rates to compensate for greater market risk. Long-term rates consist of a series of successive short-term rates. What is the basic premise of the liquidity theory? Multiple choice question. Investors are indifferent to liquidity. Investors must be paid a premium to hold more liquid securities. Investors demand a premium that is inversely related to the term to maturity. Investors must be paid a premium to offset increased future uncertainty. What is the key premise of the market segmentation theory? Multiple choice question. The key premise is that a segmented market will yield a flat yield curve. Investors do not consider securities with different maturities as perfect substitutes. Investors require a premium in direct relation to the term of a security. The key premise is that the yield curve must be upward-sloping in order for demand to equal supply in each segment. What is the interest rate called that is derived from existing spot rates on similar securities with varying terms? Multiple choice question. Compounded rate Effective annual rate Forward rate Real rate [Show Less]
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FIN 3400 Chapter 07 Assignment Questions and Answers- Florida International University
FIN 3400 Chapter 07 Assignment Questions and Answers- Florida International University Which of these statements is correct? Multiple choice question. T... [Show More] he value of the bond market is about half of the value of the stock market. The average daily trading volume of the U. S. bond market exceeds $800 billion. The bond market is an insignificant source of funds for business firms. The U. S. bond market consists of only government-issued bonds. What is an indenture agreement? Multiple choice question. A legal contract between the issuer and the bondholders An informal document which lists the key characteristics of a bond A formal document with the sole purpose of outlining the rights of bondholders in the case of default An informal document which lists the basic characteristics of a bond Select all that apply Which of these are common features of a corporate bond? Select all that apply. Multiple select question. Semi-annual interest payments Currently issued as bearer bonds Face value of $1,000 Publicly traded debt security Which one of these terms indicates a bond is unsecured? Multiple choice question. Junk bonds Senior bond Debenture Equipment trust certificate Why are U. S. Treasury bonds considered to be safe? Multiple choice question. They provide income exempt from all forms of income taxes. They are secured by the full-faith-and-credit of the U. S. government. They are repaid from user fees. They mature in one year or less. Which statement related to bonds is true? Multiple choice question. Bonds have varying levels of risk. Bonds are rarely traded. Bonds that offer high potential returns are low-risk. All bonds are considered to be low-risk. Select all that apply Which of the following may be financed with corporate bonds? Select all that apply. Multiple select question. Public roads Plant and equipment Inventory Research and development Select all that apply Which of the following are commonly included in an indenture agreement? Select all that apply. Multiple select question. Coupon rate Par value Call premium Bond price Assume a $1,000 Treasury inflation-protected bond has a 2 percent coupon and a face value at issuance of $1,000. The reference CPI is 202.34 and the current CPI is 203.18. What do you know for certain about this bond? Multiple choice question. The current par value is $1,000. The current semiannual interest payment is $10. The current par value is $1,000 but the coupon rate is currently greater than 2 percent. The coupon rate is still 2 percent but the interest payments have increased. Which one of these correctly defines a bond feature? Multiple choice question. The annual interest expressed as a percentage of face value is called a bond's yield to maturity. Bonds are fixed-income equity securities. The principal value of a bond is referred to as the par value, or face value. The maturity date is the initial date a bond was issued. What is the current face value of a $1,000 Treasury inflation-protected security if the reference CPI is 203.19 and the current CPI is 205.47? The coupon rate is 3 percent and the bond was issued two years ago. Multiple choice question. $1,011.22 $1,000.00 $1,060.90 $988.90 Speculative bonds are frequently referred to as which type of bonds? Multiple choice question. Junior bonds Junk bonds Debentures Investment grade A TIPS was issued with a par value of $1,000, a coupon rate of 2.5 percent, and a reference CPI of 204.89. Which one of these is the correct calculation of the current interest payment if the CPI is now 205.44? Multiple choice question. $1,000 × (204.89/205.44) × 0.025 $1,000 × (205.44/204.89) × 0.025 $1,000 × (205.44/204.89) × (0.025/2) $1,000 × 0.025 What is the shortest maturity for a newly issued U. S. Treasury bond? Multiple choice question. 10 years 30 years 20 years 5 years Which one of these applies to agency bonds? Multiple choice question. Highly risky securities Unique type of equity securities Issued by state and local governments Relatively safe securities Why might a corporation issue bonds? Multiple choice question. Bonds provide a perpetual source of funds. Bonds provide a steady stream of income to the issuer. Bonds tend to maximize a firm's total capital costs. Bonds may offer a lower aftertax cost than equity securities. Which one of these characteristics designates a premium bond? Multiple choice question. Market price is less than par value Coupon rate exceeds inflation rate Market price exceeds par value Coupon rate is lower than current rates Which one of these descriptions defines a Treasury inflation-protection security (TIPS)? Multiple choice question. U. S. government bond with an inflation-adjusted par value and varying interest payments U. S. government bond with inflation-adjusted interest payments and a fixed par value U.S. government bond with a variable coupon rate and a fixed par value U.S. government bond with a fixed coupon rate and par value Which of these represents the compensation earned by a bond dealer? Multiple choice question. Ask price Bid price - ask price Bid-ask spread Bid price A TIPS was issued with a face value of $1,000 and a reference CPI of 204.89. The current par value of this TIPS is $1,001.37. What is the current CPI? Multiple choice question. 204.61 202.12 205.17 207.70 Select all that apply Which of the following affect the coupon rate a firm must set on its bonds if the bonds are to be sold at par? Select all that apply. Multiple select question. Face amount Market rates of interest Bond term Default risk A TIPS was issued with a face value of $5,000, a coupon rate of 3 percent, and a reference CPI of 201.42. The current CPI is 203.14. What is the current interest payment? Multiple choice question. $75.64 $74.36 $151.28 $148.73 How much will you pay to purchase a $100,000 U. S. Treasury bond that is quoted at 99.6250? Multiple choice question. $100,099.63 $99,625.00 $199,625.00 $99,000.63 Which one of these characteristics fits the definition of an agency bond? Multiple choice question. Generally provide a lower rate of return than comparable Treasury securities Issued to support a sector of the U. S. economy Issued by the U. S. Treasury Department Backed by the full-faith-and-credit of the U. S. government Which one of the following bond quotes indicates a corporate bond is selling at a premium? Multiple choice question. 100.00 99.96 99.67 101.49 Select all that apply Which of these characteristics apply to a discount bond? Select all that apply. Multiple select question. Market price is less than the principal amount of the loan Coupon rate exceeds market rate Selling for less than face value Coupon rate equals the market rate A typical municipal bond is selling at a price of $5,114.20. What is the price quote for this bond? Multiple choice question. 100.114 102.284 114.200 100.228 An investor buys bonds at the ___ price and sells them at the ___ price. Multiple choice question. bid; ask ask; bid bid; bid ask; ask True or false: The financial status of the issuer will affect the coupon rate that issuer pays on its bonds. True false question. True False Select all that apply The market rate of interest that is used to compute the present value of a bond is affected by which of the following? Select all that apply. Multiple select question. Credit quality of the bond Tax status of the bond Bond's face value Bond's coupon rate What is the price of a $100,000 par value U. S. Treasury security if the price quote is 102.1446? Multiple choice question. $100,214.46 $102,144.60 $102,000.15 $100,102.14 What is a zero coupon bond? Multiple choice question. A zero coupon bond is sold at par value and pays no regular interest payments. A zero coupon bond is sold at a steep discount and pays no semiannual interest payments. A zero coupon bond has a current value equal to its future maturity value. A zero coupon bond is a bond that provides no interest income to its holder. A $1,000 corporate bond has an asked price of 97.82 and a bid price of 97.81. What price will you receive if you sell this bond now? Multiple choice question. $978.15 $1,000 $978.10 $978.20 Which one of these is the correct formula for computing the current value of a $1,000, 10-year, zero coupon bond if the discount rate is 8 percent? Multiple choice question. PV = $1,000/[1 + (0.08/2)]20 PV = $1,000 × [1 + (0.08/2)]20 PV = $1,000/1.0810 PV = $1,000 × (1.08)10 A municipal bond quote displays a price quote of 98.67. How is this quote interpreted? Assume a typical face value for a municipal bond. Multiple choice question. The municipal bond is selling at a premium price of $986.70. The municipal bond is selling at a discounted price of $4,933.50. The municipal bond is selling at a discounted price of $986.70. The municipal bond is selling at a premium price of $4,933.50. You want to calculate the current value of a 7-year, 6 percent coupon, corporate bond given the current discount rate of 8 percent. Which one of these is correct given the present value formula for a bond? Multiple choice question. Par value = $5,000 N = 14 i = 0.08 PMT = $60 Which of these represents the compensation earned by a bond dealer? Multiple choice question. Bid price - ask price Bid-ask spread Ask price Bid price True or false: When computing the present value of a bond, both the par value and the interest payment amount are input as positive values in a financial calculator. True false question. True False Which of these best explains the current value of a bond? Multiple choice question. The current value equals the par value plus the present value of the bond's expected future interest payments. The current value is the present value of the bond's expected future interest payments discounted at the coupon rate. The current value is the future value of the bond's cash flows compounded at the market rate of interest. The current value is the present value of the bond's expected future cash flows discounted at the market rate of interest. Corporate bond A has a 6 percent coupon and matures in 3 years. Corporate bond B has a 6 percent coupon and matures in 15 years. The current interest rate is 6 percent. By how much will Bond A and Bond B change in price if the market rate increases to 6.5 percent? Assume both bonds are currently selling at par which is $1,000. Multiple choice question. -$12.08; -$49.19 -$14.76; -$52.33 -$11.89; -$47.56 -$13.43; -$47.45 Which one of these is the best description of a 5-year zero coupon bond? Multiple choice question. A bond that will sell at par throughout the entire five years A bond with a current value equal to its discounted par value A bond that will make a total of 5 payments over its life A bond that will make a total of 10 payments over its life True or false: If you buy a bond today at par value and sell it one year from today, also at par value, the rate of return you will earn will equal to current yield. True false question. True False Select all that apply You want to compute the value of a 5-year zero-coupon corporate bond given a market rate of 5.5 percent. Which of these represent correct calculator inputs? Select all that apply. Multiple select question. PV = 1,000 i = 5.5 N = 10 FV = 1,000 What is the definition of yield to maturity? Multiple choice question. The amount paid at maturity expressed as a percentage of the current bond price The annual rate of return from the interest earnings assuming a bond is purchased today The capital gain that will be earned if a bond is purchased today and held until maturity The rate that will be earned if a bond is purchased today and held until maturity Select all that apply Which of these are basic assumptions that should be used when valuing a corporate coupon bond unless the problem states otherwise? Multiple select question. Semiannual interest payments Face value = $1,000 Face value = $10,000 Annual interest payments Which one of these explains why issuers call bonds? Multiple choice question. To issue bonds at a higher rate To refinance debt at a lower rate To replace low-coupon bonds with high-coupon bonds To benefit bondholders Which one of these represents correct calculator input for computing the current value of a 5 percent coupon compounded semi-annually? The corporate bond matures in 12.5 years. The current discount rate is 6.5 percent. Assume the face value of the bond as $1,000. Multiple choice question. FV = 10,000 I = 6.5 PMT = 25 N = 12.5 Which one of these correctly defines equivalent taxable yield? Multiple choice question. The after-tax rate earned on either a taxable or nontaxable bond. The pretax rate needed on a taxable bond to produce the same after-tax rate as a muni bond The after-tax rate needed on a corporate bond to equal the after-tax rate on a muni bond The pretax rate required on a taxable bond to yield the same rate as a muni bond Assume a corporate bond pays a 5 percent coupon and matures in ten years. What will be the change in the current price of this bond if market interest rates increase from 5 to 5.5 percent? Multiple choice question. -$38.07 +$19.04 +$38.07 -$19.04 Reason: When the coupon rate matches the market rate, a bond sells at par, which is assumed to be $1,000. Using a financial calculator, the price at 5.5 percent is: N = 20; I = 2.75; PMT = 25; FV = 1,000, CPT PV; PV = -961.93 Change in price = $961.93 - $1,000 = -$38.07 What are the taxable equivalent yields (ETY) at tax rates of 25 percent and 35 percent if the muni yield is 3.5 percent? Multiple choice question. 4.67 percent; 5.38 percent 2.63 percent; 2.28 percent 4.38 percent; 4.73 percent 2.80 percent; 2.59 percent Reason: ETY = 0.035/(1 - 0.25) = 0.0467 = 4.67% ETY = 0.035/(1 - 0.35) = 0.0538 = 5.38% What is the definition of current yield? Multiple choice question. The return provided by the annual interest expressed as a percentage of the face value The return that an investor would earn if the bond were purchased at the current price and held until maturity The return provided by the next semiannual interest payment if the bond is purchased today The return provided by the annual interest payments if the bond is purchased at the current price You need to select one of two premium bonds to purchase. You plan to hold whichever bond you select until it matures in 10 years. Which bond should you select and why? Multiple choice question. The bond with the highest yield to maturity as you prefer to earn the highest rate of return over the 10 years. The bond with the highest premium as it will provide the highest payment at maturity. The bond with the highest coupon rate because the bond is selling at a premium. The bond with the highest coupon rate because you plan to hold the bond to maturity. Which one of the following should be used to compare various corporate bonds if you plan to purchase a bond today, hold it until maturity, and want to select the bond with the highest rate of return? Multiple choice question. Yield to maturity Coupon rate Current price Current yield Which one of these is a key reason why issuers call bonds? Multiple choice question. Significant drop in market interest rates Opportunity to repay debt for less than its face value Opportunity to redeem bonds at their current market price Significant increase in market interest rates A 7.5 percent corporate bond matures in 16 years and has a price quote of 102.3. What is the yield to maturity? Multiple choice question. 6.8309 percent 7.2547 percent 7.2524 percent 6.8414 percent Reason: N = 32; PV = -1,023; PMT = 37.50; FV = 1,000; CPT I; I = 3.62735, which is the semiannual rate. YTM = 2 × 3.62735% = 7.2547% Which one of these formulas correctly computes the equivalent taxable yield? Multiple choice question. Muni yield × (1 + Tax rate) Muni yield/(1 - Tax rate) Muni yield/(1 + Tax rate) Muni yield × (1 - Tax rate) Which of the following yields or rates are inversely related to a bond's market price? Multiple choice question. Current yield, coupon rate, and yield to maturity Yield to maturity only Current yield and yield to maturity only Current yield only What rate does an investor need to earn on a corporate bond to earn the same return as he can on a 3.5 percent muni if his tax rate is 28 percent? Multiple choice question. 6.02 percent 4.48 percent 4.86 percent 2.73 percent Reason: Equivalent taxable yield = 0.035/(1 - 0.28) = 0.0486 = 4.86% What does a bond rating measure? Multiple choice question. Credit quality, or default risk Default risk and market risk Interest rate and default risk Credit quality and inflation risk Which one of these is correct if a bond is selling at a premium? Multiple choice question. Current yield > Coupon rate >Yield to maturity Yield to maturity > Coupon rate >Current yield Coupon rate > Current yield > Yield to maturity Yield to maturity > Current yield > Coupon rate A 10-year Treasury bond has a 4 percent coupon and a yield to maturity of 4.62 percent. A 10-year, A-rated corporate bond has a 4.5 percent coupon and a yield to maturity of 5.98 percent. What is the yield spread between these two bonds? Multiple choice question. 0.50 percent 1.48 percent 1.36 percent 1.98 percent What is the definition of yield to maturity? Multiple choice question. The annual rate of return from the interest earnings assuming a bond is purchased today The capital gain that will be earned if a bond is purchased today and held until maturity The amount paid at maturity expressed as a percentage of the current bond price The rate that will be earned if a bond is purchased today and held until maturity Most secondary trades in the U. S. bond market occur between which two parties? Multiple choice question. Bond dealers and private individuals Issuers and bond dealers Bond dealers and large institutions Large institutions and private individuals A corporate bond has a current yield of 6.39 percent and a price quote of 97.8. What is the coupon rate? Multiple choice question. 6.60 percent 6.50 percent 6.00 percent 6.25 percent Reason: 0.0639 = Annual interest/$978; Annual interest = $62.49 Coupon rate = $62.49/$1,000 = 0.0625 = 6.25% Select all that apply Which of the following are sources of information on the bond markets? Select all that apply. Multiple select question. The Wall Street Journal Foreign exchange market Internet Merrill Lynch Select all that apply Which of these statements is correct? Select all that apply. Multiple select question. A Treasury bond should have a higher yield to maturity than a comparable muni bond. If the market interest rate rises, bond prices will fall, and yields to maturity will rise. Investors should base their purchase decisions on the yield to call when interest rates are rising. A zero coupon bond has no yield to maturity. What is the definition of credit quality risk? Multiple choice question. The chance that a bond issuer may repay a bond prior to maturity The probability that a bond issuer will call a bond early The probability that tax rates may change in the future affecting a bond's yield The chance that an issuer will either be late paying or will not pay an interest or principal payment What is the yield spread? Multiple choice question. Difference between the current yield and the yield to maturity on any individual bond Difference between the yields to maturity on bonds with differing levels of credit risk Difference between the coupon rate and the yield to maturity Difference between the expected yield to maturity and the actual yield to maturity Where does the majority of trading volume in bonds in the secondary markets occur? Multiple choice question. Direct placements Over-the-counter NASDAQ NYSE What is a common means of reporting the daily direction of overall bond price movements? Multiple choice question. Reporting the average price change in all daily corporate bond trades Reporting the yield-to-maturity on the 10-year Treasury bonds Reporting the latest price of 10-year Treasury bonds Reporting the average coupon rate for all bonds issued that day Reason: Since the rate of interest is the key factor that affects bond prices, it is common practice to report the latest rate and daily yield change for the 10- year Treasury. Remember, interest rates and bond prices are inversely related. A 10-year Treasury bond has a 4 percent coupon and a yield to maturity of 4.62 percent. A 10-year, A-rated corporate bond has a 4.5 percent coupon and a yield to maturity of 5.98 percent. What is the yield spread between these two bonds? Multiple choice question. 1.98 percent 1.36 percent 1.48 percent 0.50 percent Reason: Spread = 5.98% - 4.62% = 1.36% [Show Less]
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FIN 3400 Chapter 08 Assignment Questions and Answers- Florida International University
FIN 3400 Chapter 08 Assignment Questions and Answers- Florida International University Select all that apply Which of these apply to publicly-issued comm... [Show More] on stock? Select all that apply. Multiple select question. Ownership position Valueless security unless dividends are currently being paid Value determined on the stock exchanges Stock value depends on the issuer's business success How important is the liquidity provided by stock exchanges to the equity markets? Multiple choice question. Of little importance Not important Somewhat important Very important A stock quote displays the last price as 28.13, down 0.10. What was the previous day's closing price? Multiple choice question. $28.23 $25.32 $31.05 $28.03 Reason: Prior day's close = $28.13 + $0.10 = $28.23 , located around the perimeter of the floor of the stock exchange, act as agents for those buying and selling stocks. Brokers Select all that apply Which of these characteristics apply to the New York Stock Exchange (NYSE)? Select all that apply. Multiple select question. Specialists No actual trading floor Brokers Physical trading floor Select all that apply Which of these descriptions apply to common stock? Select all that apply. Multiple select question. An equity security that offers ownership benefits in a corporation A security that provides voting privileges A security that provides the potential for its owner to receive both dividends and capital gains A financial security which provides guaranteed dividend payments Select all that apply Which of these characteristics apply to the American Stock Exchange but not to NASDAQ? Select all that apply. Multiple select question. Ticker symbols of one to five letters Dealers who use an electronic dealer market to affect trades. One designated market maker overseeing the process for an individual stock on a trading floor Physical trading floor Which of these is the key service provided by stock exchanges that attracts investors? Multiple choice question. Research information Ticker symbols Liquidity Trading volume reports Which of these terms best describes the trading process used by NASDAQ? Multiple choice question. Specialist system Face-to-face trading Broker system Multiple market maker system A stock quote shows a P/E of 18. How is the ratio defined? Multiple choice question. Current stock price/Last four quarters of earnings Current stock price/Estimated annual earnings for the next 12 months Average price for the last 52-week period/Last four quarters of earnings Average price for the last 52-week period/Estimated annual earnings for the next 12 months True or false: The value of a firm as measured by its market capitalization is solely dependent upon the market value of the firm's stock. True false question. True False A(n) symbol is the unique code for a company on a stock exchange. It consists of one to five letters. Select all that apply Which of these services should you expect to receive from a full-service brokerage firm? Select all that apply. Multiple select question. Low transaction costs In-depth research on individual stocks ticker Guaranteed rates of returns on equity securities Investment advice Which one of these is a factor that has minimum requirements which a firm must meet to be listed on the NYSE? Multiple choice question. Number of stockholders Number of corporate directors Dividends per share Number of employees What is the key difference between a floor broker on AMEX and a dealer on NASDAQ? Multiple choice question. A dealer sells securities and a broker buys them. A broker is a market maker while a dealer is not. A dealer operates on a trading floor while a broker deals only with electronic trades. A dealer buys and sells only from his own inventory while a floor broker executes trades both for himself and others. True or false: A dealer will buy stock from an investor at the ask price. True false question. True False If you purchase shares of stock on NASDAQ, who is the most likely seller of those shares? Multiple choice question. Broker Individual investor Specialist Dealer Select all that apply Which statements are correct? Select all that apply. Multiple select question. A market order will execute immediately, regardless of the price. A limit sell order will only execute at the limit price or higher. A limit sell order may never be executed. A limit buy order will execute as soon as the market price reaches or exceeds the limit price. What is the definition of market capitalization? Multiple choice question. Book value per share times number of shares outstanding Book value of equity Current stock prices times number of shares traded Current stock price times number of shares outstanding Which one of these is an advantage of a market order? Multiple choice question. The order will execute only at the designated price or better. The order will execute immediately. The price will be known in advance. The price obtained will be better than the going market price. Which one of the following characteristics most applies to a discount brokerage firm? Multiple choice question. Buy and sell advice offered to clients High commissions Investors place trades on the firm's Internet site In-depth stock research What is the key advantage of a limit order? Multiple choice question. The order will be executed immediately. The order must execute within 24 hours at the limit price. The order will only execute at the limit price or better. The order must execute within 48 hours at the limit price. Which one of these defines the current value of a stock? Multiple choice question. Discounted value of both the future dividends and the future stock price Compounded value of both the future dividends and the future stock price Discounted value of a future stock price Summation of future dividends and the future stock price Which of these is correct? Multiple choice question. Investors earn the spread. Investors buy stocks at the bid price. Dealers are willing to purchase stocks at the ask price. Dealers are willing to sell stocks at the ask price. Mary placed an order to purchase 100 shares of ABC stock at the going price. The order was filled as soon as it reached the floor of the exchange. What type of order did Mary place? Multiple choice question. Limit buy order Market sell order Market buy order Limit sell order Just before the market closes, ABC stock is selling for $43 a share, so you place a market sell order for 300 shares. The order reaches the trading floor after the market closes for the day. The next morning, ABC stock opens at a price of $28 a share. What happens to your order? Multiple choice question. The order is executed at a price of $43 a share. The order is never executed. The order will execute but only if the price increases to $43 a share. The order is executed at a price of $28 a share. What is the primary disadvantage of a limit order? Multiple choice question. A limit order executes after 48 hours at that day's closing price if the limit price is not obtained. The execution price may be unacceptable. A limit order may not execute. A limit order executes after 24 hours at the market price if the limit price is not obtained. Assume you are computing P0, which is the current price of a stock. What discount factor will you use to discount the dividend in year 3? Multiple choice question. (1 + i) i i 3 (1 + i) 3 Which one of these applies to stock valuation? Multiple choice question. The value of a stock today equals the discounted value of the future expected cash flows. The value of a stock can be computed with certainty. The value of a stock today is determined by the stock's historical values. The value of a stock today is based on guaranteed future cash flows. A stock is expected to pay a dividend of $2 in year 2, $3 in year 3, and sell for $40 at the end of year 3. The discount rate is 11 percent. Which one of these is the correct formula for computing the current stock price? Multiple choice question. P0 = $2/1.11 + $3/1.112 + $40/1.113 P0 = $2/1.11 + [($3 + $40)/1.112] P0 = $2/1.112 + [($3 + $40)/1.113] P0 = $2 + [($3 + $40)/1.111] True or false: A dealer will buy stock from an investor at the ask price. True false question. True False What is the key premise upon which the dividend discount model is based? Multiple choice question. The dividend amount must remain constant. Dividends are paid only for a limited number of years. Only dividends for the first 10 years are considered. All future cash flows from a stock are dividend payments. Select all that apply Which statements are correct? Select all that apply. Multiple select question. A limit buy order will execute as soon as the market price reaches or exceeds the limit price. A market order will execute immediately, regardless of the price. A limit sell order will only execute at the limit price or higher. A limit sell order may never be executed. A firm just paid an annual dividend of $1.40 and increases that dividend by 2 percent each year. How do you find the price of the firm's stock at year 4 if the discount rate is 13 percent? Multiple choice question. P4 = ($1.40 × 1.025)/(0.13 - 0.02) P4 = ($1.40 × 1.023)/(0.13 - 0.02) P4= ($1.40 × 1.02)/(0.13 - 0.02) P4 = ($1.40 × 1.024)/(0.13 - 0.02) In a stock valuation formula, what does the symbol D1 represent? Multiple choice question. Estimated dividend in time period 1, or next year's dividend when solving for the current price The price of the stock at time period 1, or next year's stock price The discount rate for time period 1 The first dividend to be received, regardless of the timing of that dividend What is the basic assumption of the constant-growth model? Multiple choice question. If the dividend amount changes each year, it does so by a constant percentage. Dividends increase by a constant dollar amount each year. Dividends must increase by a constant percentage each year. The model assumes that dividends become a constant dollar amount after a set number of years. A stock is expected to pay annual dividends of $1.20 and sell for $42.60 three years from today. Which of these is the correct formula for computing the value of the stock today if the discount rate is 9 percent? Multiple choice question. P0 = ($1.20/1.09) + ($1.20/1.092) + ($42.60/1.093) P0 = $1.203 /1.093 + ($42.60/1.093) P0 = ($1.20/1.09) + ($1.20/1.092) + [($1.20 + $42.60)/1.093] P0 = $1.20 + ($1.20/1.09) + [($1.20 + $42.60)/1.092] The overall rate of growth for a firm and its industry is 3.5 percent. Which of these combinations of dividend growth rates are acceptable when computing the current value of the firm's stock? Multiple choice question. Short-run growth = 5 percent; Long-run growth = 4 percent Short-run growth = 20 percent; Long-run growth = 5 percent Short-run growth = 15 percent; Long-run growth = 3 percent Short-run growth = 2 percent; Long-run growth = 4 percent Which one of these best defines the dividend discount model? Multiple choice question. A method of valuing a stock based on a fixed dividend amount A stock valuation method based on the present value of future dividends and an expected future stock price A method of valuing a stock by limiting the number of future dividends that are to be discounted A stock valuation method based on the present value of all future dividends Which one of these generally applies to preferred stock? Multiple choice question. Principal repaid at maturity Higher dividend yields than common stock issued by the same issuer Stock prices that are directly related to market interest rates Constant stock price Mary placed an order to purchase 100 shares of ABC stock at the going price. The order was filled as soon as it reached the floor of the exchange. What type of order did Mary place? Multiple choice question. Limit sell order Market sell order Limit buy order Market buy order Select all that apply How can a preferred stock be valued? Select all that apply. Multiple select question. Preferred stock can be valued using the constant-growth model. Preferred stock can be valued the same as a bond. Preferred stock should be valued by dividing the annual dividend by the current market price. Preferred stock can be valued as a perpetuity, PV = PMT/i A stock just paid its annual dividend of $1.20. Future dividends are expected to increase by 2 percent annually and the discount rate is 9 percent. Which of these is the correct formula for computing the current stock price? Multiple choice question. P0 = ($1.20 × 1.02)/(0.09 - 0.02) P0 = $1.20/(0.09 - 0.02) P0 = ($1.20/0.09) - 0.02 P0 = ($1.20 × 1.022)/(0.09 - 0.02) Select all that apply Assume a preferred stock pays a constant annual dividend. Which of these is a correct computation of the dividend yield? Select all that apply. Multiple select question. Dividend yield = D0/P0 Dividend yield = D1/P1 Dividend yield = D/P0 Dividend yield = D1/P0 Which of these is a limitation that applies to the constant-growth dividend model? Multiple choice question. g < 3 percent g > i or g = i g > 0 g < i How is the discount rate used to value a stock related to the expected return on the stock? Assume the stock price fairly reflects the stock's value. Multiple choice question. The discount rate should equal the expected rate of return. The discount rate should be less than the expected rate of return. The discount should be equal to or less than the expected rate of return. The discount rate should exceed the expected rate of return. Select all that apply Which of these accurately recaps dividend growth estimations and limitations as they apply to the dividend growth model? Select all that apply. Multiple select question. Dividend growth can be estimated based on historical data, dividend trends, or analyst's forecasts. Dividends can grow quickly in the short-run but cannot exceed the overall economic growth rate over the long-run. Dividend growth must not exceed the economic growth rate in either the short-run or the long-run. Dividend growth must be based on actual historical data. A stock has an expected rate of return of 10.6 percent based on a 9 percent rate of growth. What will the expected rate of return be if analysts revise the firm's growth rate to 7.5 percent? Multiple choice question. 7.5 percent 5.9 percent 9.1 percent 12.1 percent Reason: Dividend yield = 10.6% - 9% = 1.6%; Expected rate of return = 1.6% + 7.5% = 9.1% A preferred stock has which of these characteristics? Multiple choice question. Owned primarily by individual investors Zero dividend growth Residual ownership claim Guaranteed voting rights Lew's increases its annual dividend by 2 percent annually. The last dividend paid was $1.42 and the stock price is $46. How is the expected rate of return computed? Multiple choice question. i = [($1.42 × 1.02)/$46] + 0.02 i = ($1.42/$46) - 0.02 i = [($1.42 × 1.02)/$46] - 0.02 i = ($1.42/$46) + 0.02 Which of these applies to the valuation of a preferred stock? Select all that apply. Multiple select question. Preferred dividend payments are assumed to have a finite life. Preferred dividends are assumed to be a constant dollar amount. Preferred dividends are assumed to have a constant, non-zero rate of growth. Preferred dividend payments are assumed to be infinite. What is the best definition of the variable-growth rate stock valuation method? Multiple choice question. Stock valuation method used when a firm is expected to go out of business Stock valuation method used when a firm is expected to pay totally irregular dividends into infinity Stock valuation method used when a firm's current growth rate is expected to change in the future Stock valuation method used when a firm has variable earnings but a constant dividend rate of growth How is the dividend yield on a constant-dividend preferred stock defined? Multiple choice question. Last four quarters of dividend income/Current stock price Last semi-annual dividend payment/Current stock price Last quarterly dividend/Current stock price Next expected quarterly dividend/Current stock price What is the purpose of the terminal price that is used in conjunction with a variable-growth rate stock valuation formula? Multiple choice question. To replace the future price at time n To replace all of the dividends paid in stage 1 To replace all of the dividends paid in stage 2 To replace all of the dividends paid How is the discount rate used to evaluate a security related to the security's level of risk? Multiple choice question. The higher the level of risk, the lower the discount rate needs to be. There is no relationship between the discount rate and the risk level. The lower the level of risk, the higher the discount rate needs to be. The higher the level of risk, the higher the discount rate needs to be. A stock just paid an annual dividend of $1.10. The dividend is expected to increase by 10 percent per year for the next two years and then increase by 2 percent per year thereafter. The discount rate is 14 percent. Which of these correctly computes the current stock price? Multiple choice question. P0= $1.10(1.1)1.14$1.10(1.1)1.14 + $1.10(1.1)21.142$1.10(1.1)21.142+ $1.10(1.1)3+$1.10(1.1)3(1.02)0.14−0.021.143$1.10(1.1)3+$1.10(1.1)3(1.02)0.14-0.021.143 P0 = $1.10(1.14)1.1$1.10(1.14)1.1 + $1.10(1.14)2+ $1.10(1.14)2(1.02)0.1−0.021.12$1.10(1.14)2+$1.10(1.14)2(1.02)0.1-0.021.12 P0 = $1.10(1.1)1.14$1.10(1.1)1.14 + $1.10(1.1)2+$1.10(1.1)2(1.02)0.14−0.021.142 A stock has a dividend yield of 1.4 percent. What is the expected return if the growth rate is 4 percent? What if the growth rate is 8 percent? Multiple choice question. 5.4 percent; 9.4 percent 2.6 percent; 6.6 percent 5.4 percent; 8.4 percent 4 percent; 8 percent Which of these is a correct interpretation of a P/E ratio? Multiple choice question. The stock with the highest P/E has the lowest current price per dollar of earnings. The stock with the lowest P/E has the highest rate of growth. The stock with the lowest P/E has the lowest current price per dollar of earnings. The stock with the highest P/E has the highest stock price. A stock just announced that its next annual dividend will be $1.02 and it expects to increase that dividend by 2.5 percent annually. The stock is currently selling for $28 a share. How do you compute the expected rate of return? Multiple choice question. i = ($1.02 × 1.025)/$28 i = [($1.02 × 1.025)/$28] + 0.025 i = ($1.02/$28) - 0.025 i = ($1.02/$28) + 0.025 What is the primary purpose of the P/E valuation formula? Multiple choice question. Estimate future dividends Estimate the future price of a stock Estimate a firm's future earnings Determine the appropriate P/E for a firm Which of these are basic assumptions of a variable growth rate valuation? Select all that apply. Multiple select question. g1 applies to a designated number of years g1 can be negative, positive, or equal to zero g1 must be a sustainable rate of growth g2 < i What does it mean when a P/E is designated as a trailing P/E? Multiple choice question. Both the price and the earnings used in the P/E calculation were last year's values. The price used in the P/E calculation was last year's price. The earnings used in the P/E calculation were for a period greater than 12 months. The earnings used in the P/E calculation were for the past four quarters. Why do you have to use the dividend at time n + 1 to compute the terminal price in the two-stage growth valuation model? Multiple choice question. You don't. The dividend used to compute the terminal price should be the time n dividend. The terminal price is the time n + 1 price. Thus, the dividend must be the time n + 1 price. The terminal price is the time n price. The dividend used to compute a price must always be one time period ahead of the price. True or false: A growth stock is considered to be a bargain stock. True false question. True False A stock just paid an annual dividend of $0.40 per share. The firm expects to increase the dividend by 20 percent per year for the next four years and 3 percent per year thereafter. The discount rate is 11 percent. Which one of these is correct regarding the two-stage growth formula? Multiple choice question. g1 = 0.11 D0 = $0.40 × (1 + 0.20) g2 = 0.03 D1 = $0.40 A firm is expected to have net earnings of $1,480,000 three years from now. There are 500,000 shares of stock outstanding. The firm's current P/E ratio is 18 and it is expected to remain at that level. What is the firm's expected stock price for year 3? Multiple choice question. $55.07 $44.29 $49.16 $53.28 Reason: P3 = 18 × ($1,480,000/500,000) = $53.28 True or false: A P/E is a measure of relative value. True false question. True False If you want to estimate a future price, Pn, using the P/E valuation formula, you should use the estimated earnings for which year? Multiple choice question. Year n + 1 Year 0 Year n - 1 Year n Which one of these statements is correct? Multiple choice question. Media outlets generally report the forward P/E. The trailing P/E includes investor's expectations of future profits. A forward P/E is less accurate than a trailing P/E. Investors generally use the trailing P/E. Which of these indicates a value stock? Multiple choice question. High P/E, low growth Low P/E, low growth High P/E, high growth Low P/E, high growth A firm is expected to have net earnings of $4.00 per share of stock outstanding. The firm's current P/E ratio is 14 and it is expected to remain at that level. What is the firm's expected stock price for year 2? Multiple choice question. $53.28 $18.00 $102.00 $56.00 Reason: P2 = 14 × $4.00 = $56.00 A firm is expected to have net earnings of $1,480,000 three years from now. There are 500,000 shares of stock outstanding. The firm's current P/E ratio is 18 and it is expected to remain at that level. What is the firm's expected stock price for year 3? Multiple choice question. $44.29 $55.07 $53.28 $49.16 Reason: P3 = 18 × ($1,480,000/500,000) = $53.28 [Show Less]
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FIN 3400 Chapter 09 Assignment Questions and Answers- Florida International University
FIN 3400 Chapter 09 Assignment Questions and Answers- Florida International University True or false: A high-risk investment can underperform a low-risk i... [Show More] nvestment over the short term. True false question. True False How is the term "dollar return" defined? Multiple choice question. Amount of profit or loss expressed as an annual rate Amount of profit or loss from an investment expressed as a percentage of the ending price Amount of profit or loss from an investment expressed in dollars Amount of profit or loss from an investment expressed as a percentage of the investment's cost How can the percentage return on a stock be defined? Multiple choice question. Dollar return/Money invested Capital gain or loss/Money invested Dollar return/Ending stock value Capital gain or loss/Ending stock value Maria bought a stock one year ago for $16 a share. The stock pays quarterly dividends of $0.12 and is currently valued at $17 a share. How is the percentage return computed? Multiple choice question. [$17 - $16 + (4 × $0.12)]/$17 [$17 - $16 + (4 × $0.12)]/$16 ($17 - $16 + $0.12)/$17 ($17 - $16 + $0.12)/$16 For the past three years, a stock had annual returns of 14 percent, -32 percent, and 4 percent. What is the average arithmetic return? Multiple choice question. -7.33 percent 2.08 percent 1.15 percent -4.67 percent Reason: (14% - 32% + 4%)/3 = -4.67% An investor who purchases a high-risk investment should expect to earn a higher rate of return over which period of time? Multiple choice question. Any period of time No period of time Short term Long term Which of these is an accurate measure of returns that is used in performance analysis? Multiple choice question. Variance Arithmetic average return Geometric mean return Standard deviation The dollar return on a stock investment includes which of these? Multiple choice question. Dividends only Dividend income and capital gains or losses Capital gains only Capital gains and losses only The annual returns on a stock for the past four years are: 5.2 percent, -16.8 percent, 22.1 percent, and 11.4 percent. What is the geometric mean return? Multiple choice question. 4.46 percent 5.99 percent 5.48 percent 4.80 percent The percentage total return on a stock investment is expressed as a percentage of what? Multiple choice question. Par value Initial investment Final price Average price The S&P 500 had the highest decade average return for which period? Multiple choice question. 1970s 1950s 1980s 1990s Theo purchased a stock at $28 a share and sold it six months later for $23 a share. He received a $0.75 dividend. How is his percentage return calculated? Multiple choice question. ($23 - $28 + $0.75)/$23 ($28 - $23)/$23 ($23 - $28 + $0.75)/$28 ($28 - $23 + $0.75)/$23 Reason: Percentage return = ($23 - $28 + $0.75)/$28 How is standard deviation defined in relation to investments? Multiple choice question. Risk associated with a specific firm The change in the rate of return from one year to the following year Measure of average returns Measure of past return volatility, or risk A stock returned 13 percent, 8 percent, -16 percent, and 1 percent annually for the past four years, respectively. What is the arithmetic average return? Multiple choice question. 1.50 percent 4.00 percent -2.25 percent 9.50 percent What is a geometric mean return? Multiple choice question. The square root of the summation of the annual rates of return The discounted arithmetic average return The equivalent return that is compounded for N periods The sum of all returns divided by the number of returns Which of these statements regarding the standard deviation formula is correct? Select all that apply. Multiple select question. Standard deviation is a squared value. N is the total number of returns. (N - 1) is used when computing historical standard deviations. The average return is an arithmetic average. A stock provided annual returns of 11.2 percent, 16.8 percent, and 0.3 percent for the past three years. What is the geometric mean return? Multiple choice question. 9.43 percent 9.22 percent 9.36 percent 8.78 percent Reason: [(1.112)(1.168)(1.003)]1/3 - 1 = 0.0922 = 9.22% For the past three years, a stock returned 11 percent, 6 percent, and 22 percent. What is the standard deviation? Multiple choice question. 8.03 percent 6.68 percent 8.19 percent 6.87 percent Reason: Average = (0.11 + 0.06 + 0.22)/3 = 0.13; σ = {[(0.11 - 0.13)2 + (0.06 - 0.13)2 + (0.22 - 0.13)2]/(3 - 1)}1/2 = 0.0819 = 8.19% How can you best describe the relationship between the performance of long-term Treasury bonds and the S&P 500 during the period 2000-2012? Multiple choice question. The S&P 500 returns varied significantly but the Treasury bond returns did not. The Treasury bonds always produced a positive annual return but the S&P 500 did not. Their rates of return were directly related. When one asset class incurred a loss, the other class had a positive rate of return. Based on actual performance for the period 1950-2012, which one of the following displayed the least amount of risk and why? Select the best answer. Multiple choice question. T-bills as their decade average returns were all positive. Long-term Treasury bonds because their returns were higher than the Treasury bills. S&P 500 as its average return for the period exceeded T-bonds and T-bills. T-bills as their returns were less volatile. What does standard deviation measure? Multiple choice question. Average risk Market risk Total risk Firm-specific risk Select all that apply Which of these correctly describe the returns on long-term Treasury bonds for the period 1950-2012? Select all that apply. Multiple select question. Higher returns than T-bill returns over the period Higher returns than S&P 500 returns over the period More volatile than S&P 500 returns over the period More volatile than T-bill returns on an annual basis For the past three years, a stock had annual returns of 14 percent, -32 percent, and 4 percent. What is the average arithmetic return? Multiple choice question. 1.15 percent -7.33 percent -4.67 percent 2.08 percent Reason: (14% - 32% + 4%)/3 = -4.67% Which of the following is considered the risk-free asset? Multiple choice question. Treasury Bonds Municipal Bonds Treasury Bills Treasury Notes Which one of these is correct regarding the standard deviation formula? Multiple choice question. The sum of the return deviations must equal one. The deviations must be squared to eliminate all negative values. You must have at least three returns to compute a standard deviation. The returns used to compute a standard deviation must be annual returns. Which statement is true? Multiple choice question. Longer-term Treasuries tend to have the lowest level of standard deviation of any asset class. A risk-free asset class will have a high rate of return. The higher the long-term rate of return on an asset class, the higher its risk level. The higher the risk of a security, the lower the long-run expected rate of return. The variance of the returns on an individual stock is 0.060565. What is the standard deviation? Multiple choice question. 6.06 percent 12.12 percent 24.61 percent 36.72 percent Reason: σ = (0.060565)1/2 = 0.2461 = 24.61% What is the definition of the coefficient of variation? Multiple choice question. A risk-return measure that investors prefer be higher rather than lower Amount of return per unit of risk Measure of volatility Measure of total risk to reward Based on annual returns for the years 2000-2012, which one of the following exhibited the greatest risk and why? Multiple choice question. S&P 500 because the highest annual return was 28.7 percent and the lowest annual return was -35.5 percent. S&P 500 because the highest annual return was 36.4 percent and the lowest annual return was -52.3 percent. Long-term Treasury bonds because the highest annual return was 22.7 percent and the lowest annual return was -12.2 percent. Long-term Treasury bonds because the highest annual return was 31.4 percent and the lowest annual return was -16.8 percent. Based on returns and their volatility for the period 1950-2012, what can be implied about the risk level of long-term Treasury bonds? Multiple choice question. Long-term Treasury bonds are riskier than Treasury bills. Long-term Treasury bonds are risk-free. Long-term Treasury bonds are riskier than the S&P 500 index. Long-term Treasury bonds are the least risky type of debt security. A stock has a variance of 0.02468, a current price of $28 a share, and an average rate of return of 14.4 percent. How is the coefficient of variation (CoV) computed? Multiple choice question. CoV = (0.02468 × $28)/0.144 CoV = (0.024681/2)/0.144 CoV = 0.02468/0.144 CoV = 0.144/$28 True or false: T-bills are considered to be risk-free because their standard deviation of returns is always zero. True false question. True False A bond has a standard deviation of 10.7 percent and an average rate of return of 6.4 percent. What is the coefficient of variation (CoV)? Multiple choice question. 0.42 0.67 1.67 1.42 Reason: CoV = 0.107/0.064 = 1.67 Risk and expected return are ________ correlated. Multiple choice question. not positively negatively What type of risk exists in a fully-diversified portfolio? Multiple choice question. Firm-specific risk only Diversifiable risk only Both market risk and firm-specific risk Market risk only Risk, as it is used in the coefficient of variation (CoV), is best defined as a measure of which one of these? Multiple choice question. Volatility of returns Changes in price resulting from interest rate changes Possibility of default Changes in price due to changes in expected rates of growth Which of the following indicates a portfolio is becoming more diversified? Multiple choice question. Decreasing portfolio size Increasing portfolio standard deviation Decreasing portfolio standard deviation Increasing portfolio size How can firm-specific risk be defined? Multiple choice question. Risk that affects all securities Risk that cannot be reduced by diversification Risk that can be reduced by diversification Risk arising from one firm that affects all firms Which of these will calculate the coefficient of variation (CoV) for a security? Multiple choice question. Variance/Average return Standard deviation/Current price Standard deviation/Average return Variance/Current price Select all that apply Which of the following are examples of diversifiable risk? Select all that apply. Multiple select question. Decreased demand for electric cars Fraud committed by company management Increase in economic regulation Increase in interest rates For the past three years a stock has provided an average return of 11.6 percent with a variance of 0.02789. What is the coefficient of variation (CoV)? Multiple choice question. 1.36 0.67 1.44 0.01 Reason: CoV = (0.027891/2)/0.116 = 1.44 What is the primary focus of modern portfolio theory (MPT)? Multiple choice question. Minimizing portfolio risk for a given level of return Minimizing portfolio risk Achieving the maximum possible rate of return for a portfolio Eliminating all portfolio risk Stock investors cannot avoid which type of risk? Multiple choice question. Market risk Diversifiable risk Market risk and firm-specific risk Firm-specific risk Marta is risk-adverse, which is her primary investment concern. Which one of these represents an optimal portfolio for her? Multiple choice question. 9 percent return; 8 percent standard deviation 8 percent return; 7 percent standard deviation 10 percent return; 8 percent standard deviation 7 percent return; 7 percent standard deviation Which one of these best describes diversification? Multiple choice question. Investing in five retail stocks Purchasing stocks in eight different industries Purchasing ten utility company stocks Purchasing stock issued by your employer Which of these sets represents an optimal portfolio? Select all that apply. Multiple select question. 10.5 percent return; 17 percent standard deviation 10 percent return; 15 percent standard deviation 11.5 percent return; 17 percent standard deviation 11 percent return; 15 percent standard deviation What is firm-specific risk? Multiple choice question. Risk associated only with newly-formed firms Risk found only in a diversified portfolio Risk arising only from default Risk that affects only one firm or one industry Which one of these is correct? Multiple choice question. Market risk is diversifiable. Market risk is another name for total risk. Firm-specific risk is diversifiable. Market risk = Total risk + Firm-specific risk. Modern portfolio theory (MPT) is designed to achieve which one of these? Multiple choice question. Average return with lowest level of risk Lowest return with no risk Highest return with no regard to risk Highest return for a given level of risk What are the characteristics of an efficient portfolio? Multiple choice question. Rate of return equal to the market rate Constant returns over time Comprised of ten stocks or more Maximum expected return for a given level of risk Nicholas is less risk-adverse than your average investor; returns are his primary investment concern. Which one of these represents an optimal portfolio for him? Multiple choice question. 8% return; 7% standard deviation 11% return; 9% standard deviation 11% return; 8% standard deviation 7% return; 7% standard deviation Assume a portfolio with a return of 12 percent with a standard deviation of 18 percent is an efficient portfolio. Which one of these is most apt to also be an efficient portfolio? Multiple choice question. 12 percent return; 19 percent standard deviation 11 percent return; 19 percent standard deviation 13 percent return; 19 percent standard deviation 13 percent return; 17 percent standard deviation Select all that apply Which of these represents an optimal portfolio comprised of two stocks? Select all that apply. Multiple select question. 14.3 percent return; 24.8 percent standard deviation 14.9 percent return; 25.4 percent standard deviation 14.8 percent return; 25.4 percent standard deviation 14.2 percent return; 24.8 percent standard deviation Which set of securities will provide the least amount of diversification given their correlation values? Multiple choice question. Stocks C and D; 0.18 Stocks A and B; 0.49 Stocks G and H; -0.01 Stocks E and F; -0.98 How is correlation defined? Multiple choice question. Measure of total risk as it applies to a portfolio Measure of the movement of a securities' return over time Measure of the co-movement between the returns on two variables Measure of market risk relative to firm-specific risk Select all that apply Which of the following exemplifies market risk? Select all that apply. Multiple select question. A decrease in GDP output An increase in inflation An increase in taxes A decrease in a firm's sales What does a correlation value of +0.9 indicate? Multiple choice question. There is little relationship between the movements of the stock returns. The stock returns tend to move closely, although not perfectly, together. The stock returns have a slight tendency to move together. The stock returns have a strong tendency to move in opposite directions, although not perfectly so. On a graph with expected return on the vertical axis and standard deviation on the horizontal axis, where is an efficient portfolio located? Multiple choice question. At the center point of the graph At any point along a straight line between the origin and the top right corner of the graph At the top left corner of the graph At the highest return achievable for any selected standard deviation Which one of these is the correct formula for computing the return on a portfolio comprised of unequal amounts of stocks A, B, and C? Multiple choice question. Rp = (RA + RB + RC)/3 Rp = (wA × RA) + (wB × RB) + (wC × RC) Rp = (wA + wB + wC) × [(RA + RB + RC)/3] Rp = [(wA × RA) + (wB × RB) + (wC × RC)]/3 What is the shape of the efficient frontier and what does this imply? Multiple choice question. Upward-sloping; indirect relationship between risk and reward Flat; constant relationship between risk and return Downward-sloping; indirect relationship between risk and reward Upward-sloping; direct relationship between risk and return How does correlation relate to total risk? Multiple choice question. Total risk is best lowered by selecting securities that have highly positive correlation coefficients. Total risk can be lowered by eliminating firm-specific risk, which is achieved by combining securities with low, or negative correlations. Correlation and total risk are not related. Total risk can be fully eliminated by constructing a portfolio of two stocks that have a -1 correlation value,. You want to invest in two stocks that will provide you with the most diversified portfolio. You should select the two stocks with which one of these correlation values? Multiple choice question. 0.03 -0.34 -0.01 0.68 Reason: The lowest correlation value will provide the greatest diversification benefits. How is the capital gain or loss on a stock investment computed? Multiple choice question. Beginning stock value - Ending stock value Ending stock value - Beginning stock value (Ending stock value - Beginning stock value) + Dividend income (Beginning stock value - Ending stock value) + Dividend income Which of these defines correlation? Multiple choice question. Average value ranging from 0 to 1 Average value ranging from -1 to +1 Statistical value ranging from -1 to +1 Statistical value ranging from 0 to 1 What does a correlation value of zero indicate? Multiple choice question. No relationship between the co-movements of the security returns Stocks returns that move in opposite directions over time Stock returns that move in the same direction over time Stock returns that move in sync with one another What determines the weights to be used in computing a portfolio rate of return? Select an answer that applies to both equal and unequal portfolio allocations. Multiple choice question. Market value of each security expressed as a percentage of the total portfolio value Market value of each security expressed as a percentage of the initial investment in that security Market capitalization of each security divided by the total market capitalization of all securities 100 percent divided by the number of securities held in the portfolio true or false: Total risk can be reduced by combining two perfectly correlated stocks. True false question. True False How is the total dollar return on a stock investment calculated? Multiple choice question. (Ending stock value - Beginning stock value) + Dividend income (Beginning stock value - Ending stock value) + Dividend income Ending stock value - Beginning stock value Beginning stock value - Ending stock value [Show Less]
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FIN 3400 Chapter 10 Assignment Questions and Answers- Florida International University
FIN 3400 Chapter 10 Assignment Questions and Answers- Florida International University Select all that apply Which of the following will decrease the ris... [Show More] k level of a firm? Select all that apply. Multiple select question. Selling the lowest-risk division Accepting riskier projects Accepting a low-risk project Acquiring a less risky firm Which one of these best illustrates a probability distribution at it relates to next year's economy? Multiple choice question. 15 percent chance of a boom and 5 percent chance of a depression 25 percent chance the economy will grow at 5 percent or more 5 percent chance of a depression and 25 percent chance of a recession 40 percent chance of recession; 60 percent chance of a normal economy True or false: The expected return is a forward-looking return that includes risk measures. True false question. True False Which of these terms best describes an expected return with multiple states? Multiple choice question. Historical mean Geometric mean return Arithmetic average return Weighted average return There is a 75 percent chance the economy will boom and 25 percent chance it will be normal. If it booms, a stock will return 23 percent but if it is normal, the stock will lose 15 percent. Illustrate the expected return calculation. Multiple choice question. E(R) = (0.75 × 0.23) + (0.25 × -0.15) E(R) = (0.25 - 0.15) × (0.75 + 0.25) E(R) = (0.75 × 0.23) × (0.25 × -0.15) E(R) = (0.75 + 0.23) × (0.25 - 0.15) Reason: The expected return is a summation of the probabilities times the returns. E(R) = (0.75 × 0.23) + (0.25 × -0.15) Select all that apply Which of the following will increase the risk level of a firm? Select all that apply. Multiple select question. Accepting a low-risk project Accepting riskier projects Acquiring a riskier firm Selling the lowest-risk division A stock has these expected returns: Boom economy =16 percent; Normal economy = 12 percent; Recession = -6 percent, There is a 30 percent chance of a boom and a 20 percent chance of a recession. What is the expected return? Multiple choice question. 9.6 percent 3.6 percent 9.1 percent 3.2 percent Reason: E(R) = (0.30 × 0.16) + (0.50 × 0.12) + (0.20 × -0.06) = 0.096 = 9.6% Which of these illustrates the definition of a probability distribution? Multiple choice question. The sun is shining today and is supposed to shine tomorrow. It may snow either today or tomorrow. It rained three-quarters of the day yesterday. There is a 60 percent chance of rain and a 40 percent chance of pure sunshine. Select all that apply The standard deviation of expected returns with multiple economic states considers which of the following? Select all that apply. Multiple select question. The arithmetic average expected return The expected return for each economic state The squared value of each expected return Probability of occurrence for each state of the economy Which one of these should be used to estimate future stock performance? Multiple choice question. Geometric mean return Total historical return Arithmetic mean return Expected return How is required return defined? Multiple choice question. The historical average rate of return Market rate of return, usually considered to be the S&P 500 return The return on a security minus the risk-free rate Total return investors demand as compensation for the risk taken How do you explain an expected return given multiple states of the economy? Multiple choice question. Weighted average with the weights being the expected returns Expected rate of return for the state most likely to occur Summation of each expected return multiplied by its probability of occurrence Weighted geometric average with the weights being the probabilities of occurrence What type of relationship exists between risk and risk premiums? Multiple choice question. Inverse None Direct Indirect A stock has these expected returns: Boom economy = 15 percent; Normal economy = 8 percent; Recession = -3 percent. The probabilities are: Boom = 10 percent; Normal = 85 percent; Recession = 5 percent. Illustrate the expected return calculation. Multiple choice question. E(R) = (0.10 × 0.15) + (0.85 × 0.08) + (0.05 × -0.03) E(R) = (0.15/0.10) + (0.08/0.85) + (-0.03/0.05) E(R) = (0.10 × 0.15) × (0.85 × 0.08) × (0.05 × -0.03) E(R) = (0.15 × 0.08 × -0.03) + (0.10 × 0.85 × 0.05) Asset pricing can be described as which type of process? Multiple choice question. Process of determining the spread required between a bid and asked price Process of determining the price required for an asset to be immediately liquidated Process of directly specifying an equation that relates a stock's required return to an appropriate risk premium Process of analyzing market forces to determine a stock's current value There is a 5 percent chance of a depression, 25 percent chance of a recession, and a 70 percent chance of a normal economy. A stock will return 45 percent in a depression, 36 percent in a recession and 5 percent in a normal economy. What is the expected return? Multiple choice question. 14.75 percent 13.50 percent 11.25 percent 7.75 percent Reason: E(R) = (0.05 × 0.45) + (0.25 × 0.36) + (0.70 × 0.05) = 0.1475 = 14.75% Select all that apply Which of these statements related to the capital asset pricing theory (CAPM) is (are) correct? Select all that apply. Multiple select question. CAPM provides higher expected returns than those found on the efficient frontier. CAPM returns incorporate behavioral finance into efficient frontier returns. The CAPM is derived from modern portfolio theory. The key difference between CAPM returns and efficient frontier returns is the inclusion of a risk-free rate. Which one of these defines the standard deviation of expected returns given multiple economic states? Multiple choice question. Sum of the square root of each return's deviation from the average × Probability of that return Sum of the square roots of each return's squared deviation from the average × Probability of that return Square root of each return's deviation from the average × Probability of that return Square root of the sum of each return's squared deviation from the average × Probability of that return Which one of these is commonly used as a proxy for the market portfolio? Multiple choice question. U. S. Treasury Index S&P Industrial Average Dow Jones Industrial Average S&P 500 Index Select all that apply The required return on a security is equal to which of these? Select all that apply. Multiple select question. Risk-free rate + Market risk premium Real interest rate + Risk-free rate + Security's risk premium Real interest rate + Expected inflation premium + Security's risk premium Risk-free rate + Security's risk premium How is risk premium defined? Multiple choice question. Market return - Expected inflation premium A security's required return - Risk-free rate - Expected inflation premium Required return - Risk-free rate A security's required return - Market return Beta is a a measure of a stock's sensitivity to which type of risk? Multiple choice question. Firm-specific risk Diversifiable risk Market risk Total risk True or false: Asset pricing can be defined as mathematically relating a security's required return to the security's level of risk. True false question. True False What type of security, if any, has a zero beta? Multiple choice question. A risk-free security No security can have a zero beta as all security's have some level of market risk. The market portfolio A highly-risky stock Which one of these variables is used to measure compensable risk in the capital asset pricing model (CAPM)? Multiple choice question. Standard deviation, σ Alpha, α Beta, β Variance, σ2 Which one of these is a factor that most affects the level of a firm's beta? Multiple choice question. Firm's geographic location Firm's line of business Age of the firm Firm size Select all that apply The market portfolio has which of these characteristics? Select all that apply. Multiple select question. No firm-specific risk Is considered to be risk-free Is part of the efficient frontier Lies on the capital market line The security market line (SML) graphs required return against which risk measure? Multiple choice question. Diversifiable risk Total risk Market risk Firm-specific risk How is required return defined? Multiple choice question. Market rate of return, usually considered to be the S&P 500 return Total return investors demand as compensation for the risk taken The historical average rate of return The return on a security minus the risk-free rate In the CAPM formula, what does the symbol RM stand for? Multiple choice question. Market risk premium Risk-free rate of return Beta Market rate of return Beta measures which of these? Multiple choice question. Comovement between a stock and the market portfolio The amount of firm-specific risk that exists in a single security Movement of a stock in response to a change in market interest rates The total risk of an individual security If you buy a stock with a beta of 1.5 when the risk-free rate is 2% and the market rate is 12%, what is your expected rate of return? Multiple choice question. 17% 10% 18% 14% Reason: E(R) = 0.02 + 1.5(0.12 - 0.02) = 0.17 = 17.00% What does a beta of 1.0 mean for an individual security? Multiple choice question. The security is considered to be risk-free. The security has 10 percent more market risk than the market portfolio. The security has the same amount of market risk as the market portfolio. The security has 10 times more market risk than the market portfolio. If a stock has more market risk than the market portfolio and is overpriced, where will it plot on a security market line graph? Multiple choice question. To the right of the market portfolio and below the security market line To the right of the market portfolio and above the security market line To the left of the market portfolio and above the security market line To the left of the market portfolio and below the security market line True or false: The stock of a firm which sells goods that are price elastic tend to have lower betas. True false question. True False You have a portfolio invested 40 percent in a stock A with a beta of 1.6, 30 percent in stock B, and 30 percent in a risk-free asset. What is the beta of stock B if the portfolio beta is equal to the market portfolio beta? Multiple choice question. 2.0 1.2 1.4 0.8 Reason: The market beta is 1 while the risk-free beta is zero. 1 = (0.4 × 1.6) + (0.3 × βB) + (0.3 × 0); βB = 1.2 Select all that apply Which of these are characteristics of the security market line (SML)? Select all that apply. Multiple select question. Vertical intercept at the market rate of return Passes through the market rate of return Upward-sloping function Linear function How is a portfolio beta computed when the portfolio consists of $800 in stock A with a beta of 2.6 and $600 in a risk-free asset? Multiple choice question. βP =($800/$600)(2.6) + ($600/$800)(0) βP = ($800/$1,400)(2.6) + ($600/$1,400)(1) βP = ($800/$800)(2.6) βP = ($800/$1,400)(2.6) + ($600/$1,400)(0) Reason: The portfolio beta is a weighted average with the weights equal to the amount invested in each security divided by the portfolio value. The beta of a risk-free asset is zero. Select all that apply Which of these are correct versions of the Capital Asset Pricing Model (CAPM)? Select all that apply. Multiple select question. E(R) = Rf + β(RM - Rf) E(R) = Rf - β(RM) E(R) = Rf + β(Market risk premium) E(R) = Rf - β(Market risk premium) The risk-free rate is 3.2 percent while the market risk premium is 8.9 percent. How is the expected return for a stock with a beta of 0.98 computed? Multiple choice question. E(R) = 0.032 - 0.098(0.089 - 0.032) E(R) = 0.032 + 0.98(0.089 - 0.032) E(R) = 0.032 + 0.98(0.089) E(R) = 0.032 - 0.098(0.089) Reason: The 8.9 percent is the market risk premium, not the market rate of return. E(R) = 0.032 + 0.98(.089) If you buy a stock with a beta of 1.43 when the risk-free rate is 2.4 percent and the market rate is 8.7 percent, what is your expected rate of return? Multiple choice question. 10.04 percent 11.41 percent 18.27 percent 14.84 percent Reason: E(R) = 0.024 + 1.43(0.087 - 0.024) = 0.1141 = 11.41% Select all that apply Which of the following are sources for finding the beta of a stock? Select all that apply. Multiple select question. Yahoo! Finance Nightly news broadcast Value Line Investment Survey Zacks What does it mean if a stock plots on a security market line (SML) graph to the left of the market portfolio? Multiple choice question. The stock is overpriced. The stock has a beta greater than 1 and has more market risk than the market portfolio. The stock is underpriced. The stock has a beta less than 1 and has less market risk than the market portfolio. You invest equal amounts of money in four stocks with betas of 1.4, 2.6, 0.3, and 0.7. What is the portfolio beta? Multiple choice question. 1.25 1.18 1.33 1.47 Reason: βP = (1.4 + 2.6 + 0.3 + 0.7)/4 = 1.25; This can also be computed as a weighted average with each weight being 0.25. The arithmetic method works only because the weights are equal. Select all that apply How is the range of beta values defined for a portfolio of risky assets? Select all that apply. Multiple select question. The lowest possible portfolio beta is defined as the beta of a risk-free asset, or zero. The highest portfolio beta is defined as the beta of the overall market, or 1.0. The lowest possible portfolio beta is defined as the lowest beta of any security held in the portfolio. The highest possible portfolio beta is defined as the highest beta of any security held in the portfolio. A portfolio consists of $500 of stock A, $200 of stock B, and $600 of stock C. The stock betas are 1.3, 2.2, and 0.5 for stocks A, B, and C, respectively. How is the portfolio beta computed? Multiple choice question. βP = (1.3 + 2.2 + 0.5)/3 βP = ($500/$1,300)(1.3) + ($200/$1,300)(2.2) + ($600/$1,300)(0.5) βP = (0.5 × 1.3) + (0.2 × 2.2) + (0.6 × 0.5) βP = ($500/$800)(1.3) + ($200/$1,100)(2.2) + ($600/$700)(0.5) Which one of these can be used as a definition of an efficient market? Multiple choice question. Securities market where stocks are traded free of cost Securities market where stock prices are unaffected by changes in a firm's level of risk Securities market where any stock can be listed on any exchange Securities market where prices accurately value the risk-return relationship of each security given all available information A stock has a beta of 1.2, the market rate of return is 11.3 percent, and the risk-free rate is 4.2 percent. How is the expected return on the stock computed? Multiple choice question. E(R) = 0.042 + 1.2(0.113 - 0.042) E(R) = 0.042 - 1.2(0.113 - 0.042) E(R) = 0.042 + 1.2(0.113 + 0.042) E(R) = 0.042 + 1.2(0.113) Which one of these defines the efficient market hypothesis (EMH)? Multiple choice question. A theory that explains the time delays inherent in an efficient securities market A theory that outlines all the conditions necessary for a securities market to be efficient A theory that determines the number of market makers necessary for an efficient market A theory that describes what types of information are reflected in current market prices Select all that apply Which of the following help explain why beta values on the same stock can vary, if in fact they do vary? Select all that apply. Multiple select question. Returns for different reporting intervals were used, i.e., weekly versus monthly returns The beta value on a single stock will remain constant over time. A different index was used as the market portfolio, i.e., the Wilshire 5000 versus the S&P 500 A different time period was used, i.e., 1997-1999 versus 1998-2000 Which one of these correctly defines a level of market efficiency? Multiple choice question. Weak form: Prices reflect all information, both public and private Weak form: Prices reflect all public information Semi-strong form: Prices reflect all historical and public information Strong form: Prices reflect all historical and public information If a stock has more market risk than the market portfolio and is overpriced, where will it plot on a security market line graph? Multiple choice question. To the right of the market portfolio and below the security market line To the left of the market portfolio and below the security market line To the left of the market portfolio and above the security market line To the right of the market portfolio and above the security market line If the market is weak-form efficient, it renders useless which of the following? Multiple choice question. fundamental analysis technical analysis insider trading Which one of these correctly defines a portfolio beta? Assume varying amounts are invested in each security. Multiple choice question. Arithmetic average of the individual security betas The highest beta of any stock held in the portfolio A beta equal to the market portfolio beta Weighted average of the individual security betas Which one of these is an argument for market efficiency? Multiple choice question. The research findings of behavioral finance advocates Investors who are overly confident and thereby cause market prices to be overvalued based on their expectations Investors constantly seek mispriced stocks and cause that mispricing to disappear by their trades The existence of market bubbles for an extended period of time What is the definition of an efficient market? Multiple choice question. Securities market where everyone who wants to participate in the market can participate Securities market where trades occur within ten minutes of an order being placed Securities market in which prices fully reflect available information on each security Securities market where stock prices become stable over time Select all that apply Which of these are characteristics associated with a stock market bubble? Select all that apply. Multiple select question. Sustainable price increases Period of steady prices Investor enthusiasm Inflated bull market Which one of these statements applies to the efficient market hypothesis (EMH)? Multiple choice question. Security prices overreact and then settle to a price reflective of the latest information. Security prices are random. Security prices fully reflect all available information. Security prices only reflect historical and public information. The study of behavioral finance suggests that markets may not be priced efficiently for which one of these reasons? Multiple choice question. Investors may make irrational decisions. New information is hard for investors to obtain and interpret. There is a lack of market participation. Investors are always pessimistic and thus prices are too low. Kate, a corporate controller, knows her firm's earnings are going to be less than the market expects. The firm's stock price includes all information except for this. What form of market efficiency exists? Multiple choice question. Semi-strong form Strong form Weak form Select all that apply Why do managers need to understand shareholder's required returns? Select all that apply. Multiple select question. Managers must understand that increasing the risk level of a firm will increase the returns required by investors. Managers must include shareholder returns in new project analysis. Managers must also be shareholders and thus they want to be adequately compensated. Managers must ensure firms adequately reward their investors. Lucas was just charged with insider trading. What form of market efficiency cannot exist if this charge is true? Multiple choice question. The strong form of efficiency cannot exist. Neither the weak-form nor the semi-strong form of efficiency can exist. All forms of market efficiency can still exist. The weak form of efficiency cannot exist. A stock just paid an annual dividend of $1.34 which increases by 2 percent per year. How do you compute the required return if the stock is selling for $43 a share? Multiple choice question. i = [($1.34 × 1.02)/$43] + 0.02 i = ($1.34/$43) + 0.02 i = ($1.34 × 0.02)/$43 + 0.02 i = ($1.34 × 1.02)/$43 Trading based on which one of these is an argument against market efficiency? Multiple choice question. Past price trends New public information Psychological bias New privately-held information How is a stock market bubble defined? Multiple choice question. Period of overinflated prices followed by a dramatic collapse in prices Long period of rising prices followed by a period of slow growth Period of slowly rising prices that suddenly decline due to firm-specific risk Long, slow period of price increases followed by a slow decline in prices Which of these is the study of the cognitive processes and biases associated with making financial and economic decisions? Multiple choice question. Behavioral finance Executive options Managerial implications EMH theory True or false: For firms to be able to sell shares of stock, their managers must understand the returns required by shareholders. True false question. True False Which one of these formulas correctly computes the return required by an investor? Multiple choice question. i = (D1/P0) + g i = (D0/P1) + g i = D1 + g i = D0/P0 + g [Show Less]
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FIN 3400 Chapter 11 Assignment Questions and Answers- Florida International University
FIN 3400 Chapter 11 Assignment Questions and Answers- Florida International University What does a firm-wide WACC represent? Multiple choice question. A... [Show More] firm's overall cost of financing A firm's overall rate of return The current yield on a firm's outstanding debt A firm's expected return on its investments A firm funds its operations with $50 of common stock, $30 of preferred stock, and $40 of debt. The component costs are: common = 12 percent; preferred = 10 percent; pretax debt = 8 percent. Illustrate the WACC formula at a tax rate of 34 percent. Multiple choice question. WACC = ($50/$120)(0.12) + ($30/$120)(0.10) + ($40/$120)(0.08)(0.34) WACC =($50/$120)(0.12) + ($30/$120)(0.10) + ($40/$120)(0.08) WACC = ($50/$120)(0.12) + ($30/$120)(0.10) + ($40/$120)(0.08)(1 - 0.34) WACC = [($50/$120)(0.12) + ($30/$120)(0.10) + ($40/$120)(0.08)][1 - 0.34] The yield to maturity on a firm's bonds is 8.8 percent. What is the component cost of debt if the tax rate is 35 percent? Multiple choice question. 8.8 percent 11.88 percent 5.72 percent 3.08 percent Reason: Interest is tax deductible so the component cost is the after-tax cost of debt. Cost of debt = 0.088 × (1 - 0.35) = 0.0572 = 5.72% Select all that apply Which of the following are formulas that can be used to calculate the cost of equity? Select all that apply. Multiple select question. iE = [(D1/P0 + g) + (Rf + β(RM - Rf))]/2 iE = D1/P0 + g iE = [(D1/P0 + g) + (Rf + β(RM - Rf))][1 - TC]/2 iE = Rf + β(RM) Select all that apply Which of these are situations which indicate CAPM would be an inappropriate method for computing the return on equity, iE, based on the firm's historical beta? Select all that apply. Multiple select question. A 3-year old firm just announced that it has no plans to pay any dividends for the foreseeable future as all funds are needed for expansion A dividend-paying firm just doubled its operations so it can bring an entirely new product to the market A firm pays a constant dividend but is in the process of terminating operations in its most risky division A non-dividend paying firm just increased it size to keep up with the demand for its existing products Which one of these applies to the weighted-average cost of capital (WACC)? Multiple choice question. The weights are based on the cost of each component. WACC is an after-tax cost. The weights are based on book values. The tax adjustment applies to every component cost. ABC Co. was founded a year ago and pays an annual dividend of $0.20. The firm does not expect to increase this dividend as it is still in a growth stage. Which model should be used to compute the cost of equity and why? Multiple choice question. The average of the CAPM and dividend growth rates Dividend growth model as there is insufficient company history to compute beta for use in CAPM Since there is no dividend growth and insufficient data to compute beta, neither method can be used. CAPM since there is no dividend growth A firm finances its operations with $500 of common stock and $300 of debt. The cost of equity is 13 percent and the after-tax cost of debt is 5 percent. Illustrate the WACC formula at a tax rate of 15 percent. Multiple choice question. WACC = ($500/$800)(0.13) + ($300/$800)(0.05)(1 - 0.15) WACC = [($500/$800)(0.13) + ($300/$800)(0.05)][1 - 0.15} WACC = ($500/$800)(0.13) + ($300/$800)(0.05) WACC cannot be computed as there is no information regarding preferred stock. Why must the cost of debt be adjusted for taxes? Multiple choice question. The cost of debt should not be adjusted for taxes. Because interest on debt is tax deductible which lowers the firm's total cost of debt financing All sources of external financing, including the cost of debt, are adjusted for taxes Because interest payments on bonds are paid with after-tax profits What are the three sources of external capital for a firm? Multiple choice question. Common stock, preferred stock, bonds Preferred stock, bonds, retained earnings Paid in surplus, bonds, common stock Retained earnings, common stock, preferred stock A 5 percent, $1,000 bond matures in 6 years and sells for $1,023. How is the pretax cost of debt, iD, computed? Multiple choice question. N = 12, PV = -1,023, PMT = 25, FV = 1,000, CPT I; Since I will be the semiannual rate, it will need multiplied by 2. N = 6, PV = 1,023, PMT = 50, FV - 1,000, CPT I N = 6, PV = -1,023, PMT = 50, FV = 1,000, CPT I N = 12, PV = -1,023, PMT = 50, FV = 1,000, CPT I; Since I will be the semiannual rate, it will need multiplied by 2. How is the cost of equity, iE, computed if the information is available for both the CAPM and the dividend growth models? Multiple choice question. Use the CAPM value Use the average of the two costs Use the higher of the two costs Use the lower of the two costs A firm has a capital structure of 40% common stock, 10% preferred stock, and 50% debt. A new project is being internally funded. What weight should be used for equity in the project WACC? Multiple choice question. $30,000/$40,000, of 75% $30,000/($30,000 + $40,000), or 43% 50% 40% Select all that apply Which of these are situations where CAPM would be an inappropriate method of computing the cost of equity based on a firm's historical beta? Select all that apply. Multiple select question. A firm does not pay dividends. There are insufficient historical observations of beta. A firm varies its dividends based on current earnings The risk level of the firm is changing. A firm has 75,000 shares of common stock outstanding at a price of $42 a share, 10,000 shares of preferred stock at $50 a share, and 3,000 bonds with a price quote of 101.2. How is the weight of preferred stock computed for the firm's WACC? Multiple choice question. (10,000 × $50)/[(75,000 × $42) + (10,000 × $50) + (3,000 × $1,000 × 101.2) (10,000 × $50)/[(75,000 × $42) + (10,000 × $50) + (3,000 × $100 × 1.012) (10,000 × $50)/[(75,000 × $42) + (10,000 × $50) + (3,000 × $1,000 × 101.2%) (10,000 × $50)/[(75,000 × $42) + (3,000 × $1,000 × 101.2%) The cost of equity, iE, for a stock is computed accurately using the constant dividend growth model when their dividends are increasing irregularly. True false question. True False Select all that apply Which of these questions need to be answered when determining a project's WACC? Select all that apply. Multiple select question. What is the expected life of the project? How much will the project cost both to implement and to manage? How does the risk level of the project compare to the overall risk level of the firm? Which inputs should be project-specific and which should be firmwide values? Which of these values represents the pretax cost of debt? Multiple choice question. Dividend yield Yield to maturity Current yield Coupon rate Which of these inputs should be project-specific when computing a project WACC? Multiple choice question. Cost of equity Cost of equity, preferred, and debt Cost of debt Cost of preferred A bond has a coupon rate of 6 percent, a current yield of 6.5 percent, and a yield to maturity of 6.8 percent. How is the after-tax cost of debt computed if the tax rate is 34 percent? Multiple choice question. 0.068 × (1 - 0.34) 0.06 × (1 - 0.34) 0.068 × 0.34 0.065 × (1 - 0.34) Cornett Foods has a firm beta of 0.86 and a cost of equity of 11%. The risk-free rate is 4%. A project has a proxy beta of 1.22. How is the project's cost of equity computed? Multiple choice question. Project iE = 0.04 + (1.22 x 0.11) 0.11 = 0.04 + 0.86MRP Project iE = 0.04 + 1.22MRP Project iE = 0.04 + (1.22 - 0.86)×(0.11) A firm has a capital structure of 40 percent common stock, 10 percent preferred stock, and 50 percent debt. A new project is being funded with $40,000 of debt and $30,000 of common stock. What weight should be used for equity in the project WACC? Multiple choice question. $30,000/($30,000 + $40,000), or 43 percent 40 percent $30,000/$40,000, of 75 percent 50 percent A firm currently has taxable income of $87,000. A new project will increase that income by $18,000. What tax rate should be used in the project's WACC? The tax rate for income between $75,001 and $100,000 is 34 percent while it is 39 percent for income between $100,001 and $335,000. Multiple choice question. 36.50 percent 36.21 percent 35.95 percent 35.39 percent Reason: TC = ($13,000/$18,000) × 0.34 + ($5,000/$18,000) × 0.39 = 0.3539 = 35.39% Dexter's has 7,500 shares of common stock selling at $54 a share, 1,200 shares of preferred at $84 a share, and 3,000 bonds priced at $989 each. How is the weight of debt computed? Multiple choice question. $989/($54 + $84 + $989) (3,000 × $989)/[(7,500 × $54) + (1,200 × $84)] (3,000 × $989)/[(7,500 × $54) + (1,200 × $84) + (3,000 × $989)] (3,000 × $1,000 × $989)/[(7,500 × $54) + (1,200 × $84) + (3,000 × $1,000 × $989)] Select all that apply Which of these statements apply to business risk? Select all that apply. Multiple select question. Business risk is the risk of a project arising from the line of business the project is in. A change in the level of business risk can affect stockholders' required rate of return. Business risk refers to the capital structure of a firm. Business risk is related to a firm's mix of new and existing product lines. What condition must a new project meet if the project is to qualify to use the firm's WACC as the project's WACC? Multiple choice question. The new project must be very similar to the firm's existing projects. There must be no relationship between the new project and the firm's existing projects. The new project must be less risky than the firm's existing projects. The new project must be riskier than the firm's existing projects. Financial risk refers to which one of these? Multiple choice question. Risks arising from a project's line of business Capital structure decisions Risk associated with a project's operations Variability of a firm's cash flows Assume a firm takes on a new project that is much riskier than the firm's existing projects. Which party disproportionately bears this new risk? Multiple choice question. Preferred stockholders Bondholders Parties who financed the new project Common stockholders What is the pure-play approach? Multiple choice question. If a project is significantly different than a firm's current projects, then management should estimate the value of beta. Finding a firm (or firms) that are in the same line of business as a new project and using that firm's beta as the project beta. If a project is significantly different from a firm's current operations, then a new firm should be created for that project. Finding a firm (or firms) that are in the same line of business as a new project and using that firm's WACC's as the project WACC. A new project varies from Wood's operations but is similar to Creekside's operations. Creekside has a beta of 1.08 while Wood's is 1.36. The market return is 11 percent and the risk-free rate is 4 percent. How is the cost of equity for Wood's new project computed? Multiple choice question. iE = 0.04 + 1.36(0.11 - 0.04) iE = 0.40 + 1.36(0.11) iE = 0.04 + 1.08(0.11) iE = 0.04 + 1.08(0.11 - 0.04) Deno's has a beta of 0.87 while Leta's has a beta of 1.38. Both firms are considering a new project which is similar to Deno's current operations. The market rate of return is 11 percent and the risk-free rate is 4 percent. What is the cost of equity for Deno's new project? For Leta's? Multiple choice question. 13.66 percent; 13.66 percent 11.88 percent; 11.88 percent 10.09 percent; 13.66 percent 10.09 percent; 10.09 percent Lester's Markets has taxable income of $138,000 which will increase by $109,000 if a new project comes on line. What tax rate should be used in the WACC for the new project? The tax rate for taxable income between $75,001 and $100,000 is 34 percent while it is 39 percent for incomes between $100,001 and $335,000. Multiple choice question. 37.38 percent 39 percent 34 percent 34.41 percent True or false: The marginal tax rate of a firm should be used as the value of TC when computing WACC. True false question. True False How can business risk be defined? Multiple choice question. Risk arising from the use of debt Risk related to financial leverage Risk related to changes in a firm's capital structure Variability of a firm's cash flows A firm has EBIT of $110,000 and interest of $22,000. The tax rate on taxable income between $75,001 and $100,000 is 34 percent while it is 39 percent on income between $100,001 and $335,000. What value should be assigned to TC in the WACC formula? Multiple choice question. TC = Higher marginal rate = 0.39, or 39 percent TC = ($12,000/$22,000) × 0.34 + ($10,000/$22,000) × 0.39 TC = Lower marginal rate = 0.34, or 34 percent TC = ($12,000/$22,000) × 0.39 + ($10,000/$22,000) × 0.34 How is financial risk defined? Multiple choice question. The risk of a project to equity holders stemming from the use of debt The risk to equity holders if a company executive should steal all of the firm's cash The risk of a project related to the project's line of business The risk that a project's beta is incorrectly estimated Select all that apply Which of these statements related to a project's WACC formula is correct? Select all that apply. Multiple select question. The project's pretax cost of debt is equal to the firm's pretax cost of debt. The pretax cost of debt is a weighted average of the yields to maturity on all the firm's outstanding bonds. The weight of equity is the percentage of equity found in the firm's capital structure. The cost of preferred is equal to the annual dividend divided by the stock price. What value is being sought from other firms when the pure-play approach is used for a new project? Multiple choice question. Cost of debt Standard deviation Beta WACC Which variable most needs adjusting when revising a firmwide WACC into a divisional WACC? Multiple choice question. Tax rate, TC Cost of equity, iE Weights Cost of debt, iD A firm has an overall beta of 1.12 and a proxy project beta of 1.49. The risk-free rate is 3 percent and the firm's cost of equity is 11.96 percent. What is the project's cost of equity? Multiple choice question. 14.92 percent 11.96 percent 15.36 percent 12.38 percent Select all that apply Which of these are pros of using divisional WACCs as compared to applying the firmwide WACC to all projects? Select all that apply. Multiple select question. Divisional WACCS eliminate incorrect accept/reject decisions. Divisional WACCs adjust for the average risks of the projects in each division. Divisional WACCs are easier to compute. Divisional WACCs increase the accuracy of accept/reject decisions. Which of these explains the tax rate, TC as it applies to the WACC formula? Multiple choice question. The tax rate is computed as the tax savings from the interest expense divided by the total taxable income. The tax rate is the weighted average of the marginal tax rates that would have been paid on the taxable income shielded by the interest deduction. The tax rate is the rate that would apply if a firm earned one additional dollar of taxable income. The tax rate is the rate computed by dividing the total tax amount by the total taxable income. Applying the firmwide WACC to all projects results in accepting HIGH -risk projects and rejecting LOW -risk projects. This will INCREASE the firmwide risk over time. Lester's has an EBIT of $52,000 and interest of $5,000. The tax rate on taxable income between $0 and $50,000 is 15 percent while it is 25 percent on taxable income of $50,001 to $75,000. What value should be assigned to TC in the WACC formula? Multiple choice question. 0.19, or 19 percent 0.20, or 20 percent 0.25, or 25 percent 0.21, or 21 percent The adjustments used in the subjective approach are generally based on which of these? Multiple choice question. Market reactions to new information Management's opinion of both a division's level of risk and the risk-reward premium Divisional geographic locations Changes in either the market risk premium or the risk-free rate Which of these variables should be project specific when computing a project's WACC? Multiple choice question. Weights, cost of equity, and pretax cost of debt All variables should be project specific. Pretax cost of debt, cost of equity, and cost of preferred Weights, tax rate, and cost of equity What is the primary advantage of the subjective approach to divisional WACCs? Multiple choice question. A firm in a similar line of business as each division is found so divisional proxy betas can be determined Betas are computed for each division increasing the accuracy of WACC Ease of implementation with some acknowledgment of risk variations Incorrect accept/reject decisions are eliminated When computing a divisional WACC, a proxy value is needed for which one of these? Multiple choice question. Market rate of return Tax rate Annual dividends Equity risk Cal Markets has a firmwide WACC of 12.3 percent. Division A has a beta of 1.42 and has high risk. The risk-free rate is 3 percent and the market rate of return is 10 percent. Management assigns an adjustment factor of +2 to high-risk projects. What is the divisional cost of equity using the objective approach? Multiple choice question. 12.94 percent 13.68 percent 14.30 percent 17.20 percent Reason: iE Division = 0.03 + 1.42(0.10 - 0.03) = 0.1294 = 12.94% Applying a firmwide WACC to projects of varying levels of risk implies which assumption? Multiple choice question. All projects have similar risks once they are implemented. Firms prefer to accept only low-risk projects. The rate of return is unaffected by the level of risk. The risk level of the firm will decrease over time using this method. What is the primary disadvantage of the objective approach to divisional WACCs? Multiple choice question. Difficulties in allocating tax rates at the divisional level Difficulty of computing average betas for each division based on the division's projects Difficulties encountered in determining divisional costs of debt Increased number of incorrect accept/reject decisions as compared to applying the firmwide WACC Identify the results of using the firmwide WACC to evaluate all projects for decision-making? Multiple choice question. Incorrect acceptance of projects Incorrect rejection of projects Firmwide investment decisions will be most accurate Firmwide risk may vary but maximum profit will be earned Select all that apply Which of these activities will involve flotation costs? Select all that apply. Multiple select question. Funding a project with retained earnings Issuing new shares of stock to fund a firm's expansion Issuing bonds to finance a new project Redeeming bonds prior to maturity What is the subjective approach to divisional WACCs? Multiple choice question. Accepting all projects with high expected rates of return and rejecting all projects with low expected rates of return The computation of divisional WACCs based on the average betas of each division The assignment of an adjustment factor to the firmwide WACC for each division Accepting all projects from low-risk divisions while rejecting all projects from high-risk divisions How can a project's costs be adjusted to include flotation costs? Assume the flotation costs are $890,000 and the project's life is 10 years. Multiple choice question. Decrease annual costs by $89,000 Increase annual costs by $89,000 Decrease the initial investment by $890,000 Increase the initial investment $890,000 What is the key disadvantage of the subjective approach to divisional WACCs? Multiple choice question. More incorrect accept/reject decisions occur than when the firmwide WACC is applied Reliance on a person, or persons, opinion and not on quantifiable information The costs of preparing the WACCs tend to be higher than the benefits Time required to gather necessary data Louis Enterprises stock is selling for $48 a share. Flotation cost on new equity issues is 15 percent. How is the value of F computed for use in the flotation-adjusted cost of equity formula? Multiple choice question. F = $48/(1 + 0.15) F = (1 - 0.15) × $48 F = 0.15 × $48 F = 1.15 × $48 What is the basic procedure used in the objective approach to divisional WACCs? Multiple choice question. Compute average divisional betas, divisional costs of equity, and WACCs Apply the firmwide beta to all divisions and projects Compute an adjustment to the firmwide WACC for each division Find firms in the same line of business as each division and use their betas as divisional proxy betas What is the flotation-adjusted cost of equity formula? Multiple choice question. iE = (D1/P0 + g) × (1 + F) iE = D1/(P0 - F) + g iE = (D1 + F)/P0 + g iE = D1/P0 + g + F Which one of these represents a key advantage of the objective approach to divisional WACCs? Multiple choice question. Automatically-adjusted WACC as divisional projects change Easier to implement than other methods Use of standard deviation, rather then beta, which is a better measure of risk More accurate measure of a division's required return than other methods What are flotation costs? Multiple choice question. Costs associated with computing divisional betas Fees paid to investment banks for issuing new securities Interest paid on new debt securities Costs incurred when new projects are funded with retained earnings Which one of these is an acceptable method of handling flotation costs when evaluating a project? Multiple choice question. Ignoring the costs as they are financing costs Decreasing the project's WACC Increasing the project's WACC Increasing the tax rate by an offsetting amount How are flotation costs incorporated into the constant-growth formula for computing the cost of equity? Multiple choice question. They are subtracted from the stock price. They are subtracted from the dividend amount. They are added to the unadjusted cost of equity, iE. They are added to the growth rate. ABC Co. expects to pay an annual dividend of $1.36 next year with annual increases of 2 percent thereafter. The current stock price is $38 a share. Flotation costs on new equity shares is 12 percent. How is the flotation-adjusted cost of equity computed? Multiple choice question. iE = $1.36/[$38 × (1 - 0.12)] + 0.02 iE = [$1.36/$38 + 0.02] × (1 + 0.12) iE = [$1.36 + (0.12 × $38)]/$38 + 0.02 iE = $1.36/$38 + 0.02 + (0.12 × $38) [Show Less]
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FIN 3400 Chapter 12 Assignment Questions and Answers- Florida International University
FIN 3400 Chapter 12 Assignment Questions and Answers- Florida International University What is pro forma analysis? Multiple choice question. Comparing ... [Show More] the financial statements from one time period to another Ascertaining how an action would affect a firm's taxes Reviewing historical data to determine trends Estimation of future project cash flows using only the relevant parts of the financial statements What is an incremental cash flow? Multiple choice question. A cash flow that increases when a new project is implemented A cash flow that affects a firm's revenues A cash flow that either increases or decreases when a new project is implemented A cash flow that changes when one more unit is produced Which one of these represents an opportunity cost? Multiple choice question. Assigning a current employee to a new project Buying some new equipment for use in a new project Hiring a new employee for a recently approved project Conducting market research to determine if a new product is feasible Mike's Garage spent $1,000 last week to repair its parking lot. No matter what Mike does, he cannot recoup this expense for his business. What type of cost is this? Multiple choice question. Sunk cost Opportunity cost Incremental cost Marginal cost Which one of these is an example of the substitution effect? Multiple choice question. Hiring Joe rather than Larry to oversee a new project Telling a customer that either one of two existing products will meet their need The variable costs of a firm's existing product increases due to a new product requiring the same resources Current employee costs are lowered due to the automation processes implemented by a new project In proforma analysis, what determines whether or not an account on the balance sheet or income statement is relevant to a project? Multiple choice question. If the account was listed on the latest financial statement, then it is relevant. If the project causes an account value to change, then it is relevant. Income statement accounts are all relevant but balance sheet accounts are not. Only income and variable expense accounts are relevant. Select all that apply How can you determine if a cash flow is incremental to a project? Select all that apply. Multiple select question. The cash flow is unaffected by a new project. The cash flow occurs only if a new project is implemented. The cash flow will disappear when the project ceases. The cash flow changes only when a new project is implemented. How is bond interest included in the analysis of a new project? Multiple choice question. Bond interest increases the amount of net working capital required for a project and is treated as a cash outflow for the project Bond interest is ignored when analyzing a new project because it is a financing expense. Bond interest is added as an expense on the project's pro forma income statement Bond interest is included in the computation of a bond's yield to maturity, which is the pretax cost of debt used to compute a project's WACC Select all that apply Which of these represent opportunity costs? Select all that apply. Multiple select question. Building a new building on a vacant lot owned by the firm The research and development costs related to a new project Using a piece of company equipment that has been sitting idle for two years in a new project Using a current employee who is about to be laid off to run a project on a day by day basis What are the key differences between the free cash flows of a firm and those of a project? Select all that apply. Multiple choice question. Firm free cash flows consider the effects of taxes while project free cash flows ignore tax effects. Firm free cash flows are computed using a subset of a firm's pro forma statements while project free cash flows use the entire financial statements. Firm free cash flows are actual values while project free cash flows are estimates. Firm free cash flows ignore depreciation expense while project free cash flows include depreciation. Why are sunk costs excluded from project analysis? Multiple choice question. The costs have been incurred and cannot be recouped with or without the project. Sunk costs occur only after a project has been fully implemented. Sunk costs only occur if a project is rejected. Sunk costs are firmwide costs. Select all that apply What types of costs are included in an asset's depreciable basis? Select all that apply. Multiple select question. Purchase price of the asset An adjustment downward to record the selling price of the asset replaced Sales tax and freight charges Installation and testing costs Select all that apply Which of these illustrates a complementary effect? Select all that apply. Multiple select question. Customers buy the new product rather than an existing product A decrease in the overall level of sales of existing products caused by the introduction of a new product A new product increases the sales of one of the firm's existing products A new product increases traffic flow thereby increasing the revenue generated by a firm's existing products How can straight-line depreciation be defined? Ignore the half-year convention. Multiple choice question. Total cost of an asset minus its projected ending market value divided by the asset's life Total amount to be depreciated spread evenly over an asset's life The depreciable basis minus the projected ending market value divided by the asset's life Total cost of an asset divided by the asset's life A new asset costs $28,000 including all sales taxes and other installation costs. The asset is to be depreciated to an ending book value of $5,000 over the asset's 5-year life. The asset is expected to be sold for $7,800 at the end of the five years. How is the annual depreciation computed? Multiple choice question. ($28,000 - $5,000)/5 ($28,000 - $7,800)/5 ($28,000 + $7,800)/5 $28,000/5 How are the dividends paid on stock included in the analysis of a new project? Multiple choice question. They are not included because stock dividends are a financing cost. Dividends are treated as a cash outflow for the time period in which they are paid. Financing costs, such as dividends, are considered in the component costs of capital when a project's WACC is calculated. Dividends are included as an expense in the project's pro forma income statement. How is operating cash flow (OCF) defined? Multiple choice question. EBIT (1 - Tax rate) + Depreciation (EBIT + Depreciation)(1 - Tax rate) EBIT - Taxes EBIT (Tax rate) + Depreciation Free cash flows for which one of the following are affected by estimation error? Multiple choice question. Neither firm nor project free cash flows Both firm and project free cash flows Project free cash flows only Firm free cash flows only The values for the first year of a project are: Expected sales of 280 units, a selling price of $46, fixed costs of $3,100, depreciation of $1,100, variable cost per unit of $28, and a tax rate of 35 percent. What is the OCF? Multiple choice question. $546 $2,361 $3,661 $1,646 Reason: OCF = {[280($46 - $28)] - $3,100 - $1,100}(1 - 0.35) + $1,100 = $1,646 McGinty's purchased a new machine for $318,000, paid $19,000 in sales tax, and $7,500 in delivery charges. The firm paid $3,400 to have the machine calibrated once it was set in place. The machine requires $5,600 of annual maintenance. What is the depreciable basis of the machine? Multiple choice question. $344,500 $340,400 $347,900 $353,500 Reason: Depreciable basis = $318,000 + $19,000 + $7,500 + $3,400 = $347,900 Which one of these represents a time zero project cash flow? Multiple choice question. Purchase of new equipment to start a project Operator hired to run new equipment Sale of equipment at the end of the project Annual maintenance on project equipment Which one of these computes the amount of annual depreciation using the straight-line method? Ignore the half-year convention. Multiple choice question. (Depreciable basis - Ending book value)/Life of asset (Asset purchase price - Ending book value)/Life of asset Depreciable basis/Life of asset Asset cost/Life of asset Select all that apply What two conditions must exist for equipment to have no effect on a project's final cash flows? Select two. Assume there are no disposal costs. Multiple select question. Zero market value Zero book value Zero future use to the firm Usable by another of the firm's existing projects A firm purchased a new machine costing $28,000 including sales tax. It also paid $2,000 for delivery and installation. The machine has a life of 6 years and an expected ending book value of $5,000. How is the depreciation computed using the straight-line method? Ignore the half-year convention. Multiple choice question. ($28,000 + $2,000 - $5,000)/6 ($28,000 + $2,000 + $5,000)/6 ($28,000 - $5,000)/6 $28,000/6 How is the gain or loss on a sale of equipment determined? Multiple choice question. Market value - Book value Book value - Market value Book value + Market value Market value - Initial cost Which one of these is a correct formula for OCF, assuming there is no interest expense? Multiple choice question. Net income - Taxes + Depreciation Net income + Taxes Net income + Depreciation Net income – Depreciation In four years, an existing machine will have a zero book value and a market value of $4,200. A new machine costing $26,400 can replace this machine, lower variable costs by $8,200 a year, and have a market value of $13,300 and a zero book value in 4 years. The incremental depreciation is $5,300. The tax rate is 35 percent. What is the free cash flow for year 4? Multiple choice question. $13,100 $9,200 $11,600 $8,400 Reason: OCF = ($8,200 - $5,300)(1 - 0.35) + $5,300 = $7,185; FCF = $7,185 + $13,300(1 - 0.35) - $4,200(1 - 0.35) = $13,100 Values for the first year of a project are projected as: Sales = $1,800, Depreciation = $300, Fixed costs = $450, Variable costs = $620, Tax rate = 34 percent. What is the OCF? Multiple choice question. $583.80 $730.00 $430.00 $283.80 Reason: OCF = ($1,800 - $620 - $450 - $300)(1 - 0.34) + $300 = $583.30 If you add all the cash flows related to net working capital (NWC) over a project's life, what sum must you obtain if your cash flows are correct? Multiple choice question. An amount equal to the initial NWC requirement Zero An amount equal to CF0 An amount equal to the highest NWC requirement for any one year Select all that apply Manor's purchases some equipment in preparation for a new project. Which of these are time zero cash flows for that project? Select all that apply. Multiple select question. Management's time spent in determining which equipment to purchase Shipping costs to have the equipment delivered Installation and initial testing costs Purchase price of the equipment Select all that apply A new project requires $24,000 of equipment which will be depreciated straight-line to zero over the project's 4-year life. The project requires $2,400 of NWC, the annual OCF is $16,000, and the tax rate is 35 percent. The equipment's market value at the end of year 4 is $5,000. What cash flows occur in year 4? Select all that apply. Multiple select question. $5,000 $5,000 × (1 - 0.35) $2,400 $16,000 × (1 - TC) Select all that apply What types of activities related to a project's fixed assets can create a cash flow for the final year of a project? Select all that apply. Multiple select question. Selling the project's equipment Scrapping fully depreciated equipment at a zero selling price Scrapping equipment that has a positive book value but no market value Trading in the project's equipment on new equipment for other projects Over how many tax years will a 3-year asset be depreciated given the half-year convention? Multiple choice question. 5 years 3 years 4 years 2 years Which one of these explains the after-tax cash flow formula for the sale of an asset? Multiple choice question. The cash flow equals the book value plus the after-tax value of any gain or loss on the sale. The cash flow equals the market value plus the after-tax value of any gain or loss on the sale. The cash flow equals the after-tax value of any gain or loss on the sale. The cash flow equals the sale price plus the after-tax value of any gain or loss on the sale. What is the double-declining balance (DDB) method of depreciation? Multiple choice question. The depreciation is equal to twice the straight-line amount over the life of an asset. Depreciation for each year is equal to twice the straight-line amount until an asset is fully depreciated. The depreciation rate is applied each year to the average of an asset's beginning and ending book values for the year. The depreciation rate is 200 percent of the straight-line rate with the rate applied to the current book value. In 4 years, an existing machine will have a zero book value and a market value of $4,200. A new machine costing $26,400 can replace this machine, lower variable costs by $8,200 a year, and have a market value of $13,300 and a zero book value in 4 years. The incremental depreciation is $5,300. The tax rate is 35%. What is the operating cash flow for year 4? Multiple choice question. $9,200 $7,185 $13,100 $4,200 Reason: OCF = ($8,200 - $5,300)(1 - 0.35) + $5,300 = $7,185 Which one of these is a feature of MACRS depreciation? Multiple choice question. Depreciation commences with an accelerated method and later switches to a straight-line method. Depreciation is computed using the DDB method over the asset's life. MACRS ignores the half-life convention. MACRS produces a higher book value of an asset during the early years as compared to straight-line depreciation. Select all that apply A project has a 3-year life and annual sales projections of $120,000, $160,000 and $190,000 for years 1 to 3, respectively. The project requires net working capital (NWC) equal to 5 percent of the next year's sales. How is this requirement handled in project analysis? Select all that apply. Multiple select question. A cash outflow of (0.05 × $120,000) is recorded at time zero. A cash inflow of (0.05 × $190,000) occurs in year 3. A cash outflow of [0.05 × ($160,000 - $120,000)] is recorded in year 1. A cash outflow of [0.05 × ($190,000 - $160,000)] in year 3. Select all that apply A project has a 3-year life and requires equipment costing $34,000. The OCF is estimated at $16,000 annually. NWC of $3,500 is required over the project's life. What cash flows occur at time zero? Select all that apply. Multiple select question. $16,000 -$34,000 -$3,500 $0 The half-year convention is based on which of these assumptions? Multiple choice question. 50 percent of the assets are acquired on the first day and the other 50 percent are acquired on the last day of a given period. Any asset purchased during a given period is assumed to be only half paid for during that period. Any asset placed in service during a given period is assumed to be placed in service on the last day of the given period. All assets placed in service during a given period were placed in service at the mid-point of the period. How do Section 179 deductions aid small businesses? Multiple choice question. Section 179 grants a tax credit, or dollar for dollar reduction in taxes, in an amount equal to the cost of the eligible property acquired. Section 179 allows depreciation deductions in excess of a firm's taxable income, thereby allowing firms to receive a tax refund of the excess amount. Section 179 allows eligible property, up to stated limits, to be fully expensed in the year of purchase. Section 179 allows firms established within the past 5 years to fully depreciate all asset purchases in the year of acquisition. What does accelerated depreciation indicate? Multiple choice question. Depreciation of an asset is completed within the first year. Depreciation in the first half of an asset's life is greater than half of the assets value. Depreciation is taken for an entire 12-month period during the first year. Depreciation of an asset is done evenly over the asset's life with an entire year's worth deducted in year 1. An asset is 5-year MACRS property and has an initial cost of $64,200. The MACRS percentages are: 20, 32, 19.2, 11.52, 11.52, and 5.76 percent for years 1 to 6, respectively. What is the book value at the end of year 4? Multiple choice question. $3,697.92 $8,308.14 $7,395.84 $11,093.76 Reason: Book value4 = $64,200 × (1 - 0.2 - 0.32 - 0.192 - 0.1152) = $11,093.76 Why would a firm prefer to use MACRS rather than straight-line depreciation for tax purposes? Multiple choice question. The tax deduction from depreciation is greater in the early years. The firm's taxes will be lower over the life of the project. The total amount of depreciation will be greater with MACRS. The IRS requires that MACRS be used. A firm has an existing asset with a book value of $6,600 and annual depreciation of $2,200. Assume this asset is replaced with a new asset costing $15,400. The new asset will be depreciated straight-line over its 5-year life. What is the incremental depreciation for year 2? Multiple choice question. $880 $13,200 $1,760 $3,080 Reason: Depreciation2 = ($15,400/5) - $2,200 = $880 If you add all the cash flows related to net working capital (NWC) over a project's life, what sum must you obtain if your cash flows are correct? Multiple choice question. Zero An amount equal to the initial NWC requirement An amount equal to the highest NWC requirement for any one year An amount equal to CF0 Select all that apply Which of these are cash flows that apply to a replacement problem? Select all that apply. Multiple select question. Depreciation lost if existing asset is sold Cost of new asset ATCF of an existing asset at its normal life-end Current book value of existing asset Select all that apply A new project requires $24,000 of equipment which will be depreciated straight-line to zero over the project's 4-year life. The project requires $2,400 of NWC, the annual OCF is $16,000, and the tax rate is 35 percent. The equipment's market value at the end of year 4 is $5,000. What cash flows occur in year 4? Select all that apply. Multiple select question. $2,400 $5,000 × (1 - 0.35) $5,000 $16,000 × (1 - TC) New equipment was purchased for a project at a total cost of $210,000 and was depreciated straight-line over five years. The equipment was sold at the end of three years for $68,000. How is the ATCF computed using a tax rate of 34 percent? Multiple choice question. ATCF = $210,000 + ($68,000 - $210,000)(1 - 0.34) ATCF = $68,000(1 - 0.34) Book value = $210,000 - (3/5 × $210,000); ATCF = Book value + ($68,000 - Book value)(1 - 0.34) Book value = $210,000 - (3/5 × $210,000); ATCF = $68,000 + (Book value - $68,000)(1 - 0.34) Reason: Book value = $210,000 - (3/5 × $210,000); ATCF = Book value + ($68,000 - Book value)(1 - 0.34) Which one of these represents a limit placed on Section 179 deductions? Multiple choice question. Annual deduction cannot exceed a firm's retained earnings Taxable income from the active conduct of the firm $2.5 million maximum cost of eligible property (for 2010) Maximum deduction of $2 million A cost-cutting project is least apt to affect which one of these? Multiple choice question. Revenue Depreciation Variable costs Net working capital An asset has a depreciable basis of $13,200 and qualifies as 3-year MACRS property. The MACRS percentages are: 16.67, 33.33, 33.33. and 16.67 percent for years 1 to 4, respectively. What is the year 3 ending book value? Multiple choice question. $1,209.57 $2,200.44 $815.03 $0 Reason: Book value3 = $13,200 × (1 - 0.1667 - 0.3333 - 0.3333) = $2,200.44 Select all that apply Which of these conditions generally occur in situations where equivalent annual cost (EAC) applies as the method of decision making? Select all that apply. Multiple select question. Both assets may produce the same level of sales. Both assets have the same projected life. Both assets cost the same. Two assets can be used for the same purpose A firm has an existing asset with a book value of $6,600 and annual depreciation of $2,200. Assume this asset is replaced with a new asset costing $15,400. The new asset will be depreciated straight-line over its 5-year life. What is the incremental depreciation for year 4? Multiple choice question. $13,200 $3,080 $1,760 $880 Reason: The existing asset will be fully depreciated in year 3 so there is no foregone depreciation in year 4. Depreciation4 = $15,400/5 = $3,080 Which question is the basis for determining which one of a set of alternative assets with differing lives is preferable? Multiple choice question. Which asset has the longest life? Which asset has the highest resale value? Which asset will produce the least negative EAC? Which asset provides the greatest depreciation tax shield? How can a replacement problem be defined? Multiple choice question. Buying a new asset to replace an asset that is fully depreciated and no longer usable Buying a new asset which will be used in place of an existing asset that is still usable Selling an asset that a firm is currently utilizing Selling an asset while it still has a positive book value What is the second step of the EAC process? Multiple choice question. Determine the relevant costs of each project Determine how an asset will be replaced when it wears out. Find the present value of each of a project's cash flows and sum those amounts. Find the annuity payment that has the same present value as the sum of the present values of a project's cash flows An asset with a remaining book value of $138 is sold for $96. How is the after-tax cash flow (ATCF) computed if the tax rate is 35 percent? Multiple choice question. ATCF = $138 + ($138 - $96)(1 - 0.35) ATCF = $96 + ($96 - $138)(1 - 0.35) ATCF = $96 + ($138 - $96)(1 - 0.35) ATCF = $138 + ($96 - $138)(1 - 0.35) A machine has an initial cost of $32,000 and annual after-tax net expenses of $2,600. The life of the machine is three years, after which the machine will be worthless. The discount rate is 13 percent. How is the sum of the present values (NPV) of the machine's cash flows calculated? Multiple choice question. NPV = -$32,000 - $2,600 - $2,600/1.13 - $2,600/1.132 - $2,600/1.133 NPV = -$2,600/1.13 - $2,600/1.132 - $2,600/1.133 NPV = -$32,000 - $2,600/1.13 - $2,600/1.132 - $2,600/1.133 NPV = -$32,000 + $2,600/1.13 + $2,600/1.132 + $2,600/1.133 What typifies a cost-cutting project? Multiple choice question. The new asset qualifies as Section 179 property thereby lowering future depreciation costs. No revenue is generated by the project. The new asset lowers the required working capital. The cost of the new assets is less than the market value of the existing assets. A new asset costs $47,000, has a 3-year life, and annual after-tax net expenses of $3,700. What is the EAC at a discount rate of 11 percent? Multiple choice question. -$18,406.67 -$19,894.14 -$22,933.01 -$22,308.81 Reason: NPV = -$47,000 - $3,700/1.11 - $3,700/1.112 - $3,700/1.113 = -$56,041.74; N = 3, I = 11, PV = 56,041.74, FV = 0, CPT PMT; PMT = -22,933.01 Which one of these is a key assumption in situations where EAC is used as the decision method? Multiple choice question. Whenever the chosen asset wears out, the project will double in size and two assets will be required as replacements. Whenever the chosen asset wears out, it will be replaced with the alternative asset. Whenever the chosen asset wears out, it will not be replaced. Whenever the chosen asset wears out, it will be replaced with an identical asset. Why are a firm's target capital structure values used in computing the average flotation cost? Multiple choice question. The target capital structure accurately reflects the current levels of debt and equity. There is no real reason. It is just common practice. The firm will issue securities in these percentages over the long term. The market weights of a firm's capital structure are difficult to compute. In essence, the EAC process makes a decision based on which one of these? Multiple choice question. Cost of an asset Life of an asset Perpetuity payment amount The replacement period How is free cash flow defined? Multiple choice question. Cash flow that avoids taxation Cash flow above that which is expected from a new project Cash flow arising from external sources Cash flow available for distribution to a firm's investors What is the first step in the EAC process? Multiple choice question. Determine which project has the least negative EAC Find the sum of the present values of the cash flows for one iteration of each project Determine the sales levels for each project. Find the perpetuity payment that produces a sum of present values that matches that of each project An asset has a 4-year life and a sum of present values (NPV) of cash flows of -$46,900. The discount rate is 12 percent. How is the equivalent annuity payment, or EAC, computed? Multiple choice question. N = 4, I = 12, PV = 0, FV = 46,900, CPT PMT N = 4, I = 12, PV = 46,900, PMT = 0, CPT FV N = 4, I = 12, PMT = 46,900, FV = 0, CPT PV N = 4, I = 12, PV = 46,900, FV = 0, CPT PMT A machine costs $112,000, has a 2-year life and annual after-tax net expenses of $31,400. What is the EAC at rate of 14 percent? Multiple choice question. -$87,400.00 -$95,308.19 -$99,416.45 -$90,543.97 Reason: NPV = -$112,000 - $31,400/1.14 - $31,400/1.142 = -$163,705.14; N = 2, I = 14, PV = 163,705.14, FV = 0, CPT PMT; PMT = -99,416.45 Assume the initial costs of a project, CF0, are $38,000 and the weighted average flotation cost, fA, is 6.7 percent. How is the flotation-adjusted CF0 computed? Multiple choice question. $38,000/(1 + 0.067) $38,000/(1 - 0.067) $38,000 × (1 - 0.067) $38,000 × (1 + 0.067) Select all that apply Which of these correctly define free cash flow? Select all that apply. Multiple select question. FCF = EBIT + Depreciation - Taxes FCF = Net income - Change in gross fixed assets - Change in net operating working capital FCF = OCF - Investment in operating capital FCF = [EBIT(1 - Tax rate) + Depreciation] - [Change in gross fixed assets + Change in net operating working capital] [Show Less]
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FIN 3400 Chapter 14 Assignment Questions and Answers- Florida International University
FIN 3400 Chapter 14 Assignment Questions and Answers- Florida International University Select all that apply Which of these can cause a firm to incur sho... [Show More] rtage costs? Select all that apply. Multiple select question. Granting too little credit to customers Being out of an inventory item Borrowing too much from suppliers Having too little cash on hand A firm should try to equal the marginal benefit of each dollar invested in net working capital with which one of these? Multiple choice question. Marginal opportunity cost of not having that dollar invested in fixed assets with positive NPVs Marginal cost of each additional dollar funded by current liabilities Marginal cost of producing one more item for sale Marginal interest cost of each additional dollar of debt When does the operating cycle end? Multiple choice question. When a firm pays its supplier When a product is sold When a product is finished and ready for sale When a customer pays for a purchase What comprises the operating cycle? Multiple choice question. Days' sales in inventory - Average collection period Days' sales in inventory + Cash cycle Average payment period + Average collection period Days' sales in inventory + Average collection period A firm holds inventory on its shelves for 92 days, pays its suppliers in 34 days, and collects payments from its customers in 29 days, on average. How is the operating cycle calculated? Multiple choice question. 92 days + 34 days 34 days + 29 days 92 days + 29 days 92 days - 34 days + 29 days Select all that apply What must a firm consider regarding its net working capital? Select all that apply. Multiple select question. How can a firm get others to finance its current assets? What is the ideal level of current assets? What other costs will be incurred if shortage costs are lowered? How can a firm finance its fixed assets? Which one of these defines the cash cycle? Multiple choice question. Operating cycle - Average collection period Days' sales in inventory + Average collection period - Average payment period Average collection period - Average payment period Days' sales in inventory + Average payment period - Average collection period True or false: Firms should eliminate all net working capital which they cannot fund internally. True false question. True False Assume a firm decreases its inventory by 3 days of sales, increases its accounts payable by 4 days, and increases accounts receivable by 2 days. What is the net change in the cash cycle? Multiple choice question. Increase of 1 day Increase of 3 days Decrease of 5 days Decrease of 1 day Reason: The cash cycle decreases when the inventory or accounts receivable periods decrease or when the accounts payable period increases. Net change = -3 + 2 - 4 = -5 days When does the operating cycle begin? Multiple choice question. When raw materials are acquired When a firm pays for its raw material purchases When a product is delivered to a customer When a product is ready for sale Carrying costs are defined to include which one of these? Multiple choice question. Costs required to provide ongoing repairs and maintenance of a firm's equipment Costs related to securing additional debt financing to fund current asset purchases Costs associated with the ordering and shipping of new inventory Explicit costs necessary to maintain the value of the current assets How will an increase in the time it takes to collect a payment from a customer affect the operating cycle? Multiple choice question. The operating cycle will not be affected. The operating cycle will decrease. The operating cycle will increase. The operating cycle will either be unaffected or increase. A firm has credit sales of $8,400, cost of goods sold of $3,900, inventory of $600, and accounts receivable of $700. How is the operating cycle computed? Multiple choice question. ($600/$3,900) + ($700/$8,400) ($3,900/$600) + ($8,400/$700) [($600 × 365)/$3,900] + [($700 × 365)/$8,400 [$3,900/($600 × 365)] + [$8,400/($700 × 365)] Select all that apply Which of these are carrying costs? Select all that apply. Multiple select question. Installing cameras to prevent inventory thef Paying for credit checks on customers who apply for credit Investing cash in inventory rather than purchasing new equipment Paying shipping on an out-of-stock item ordered by a customer Which part of the operating cycle must a firm finance from sources other than current liabilities? Multiple choice question. Average collection period Inventory period, or days' sales in inventory Average payment period Cash cycle Select all that apply Which of these are shortage costs? Select all that apply. Multiple select question. Denying credit to a credit-worthy customer Overnight delivery cost for an out-of-stock item Renting additional retail space to display inventory Throwing away obsolete inventory Which one of these will increase the cash cycle, all else held constant? Multiple choice question. Decreasing the operating period Decreasing the average payment period Decreasing the average collection period Decreasing the days' sales in inventory Retail stores generally have which type of demand for current assets? Multiple choice question. A seasonal demand in addition to a steady year-round current asset demand A steady asset demand for current assets but a seasonally-influenced demand for fixed assets. A seasonal demand that peaks in different seasons each year A steady year-round demand for both fixed and current assets How are the opportunity costs associated with having capital tied up in current assets rather than in more productive fixed assets classified? Multiple choice question. Marginal costs Shortage costs Fixed costs Carrying costs Select all that apply Which of these are characteristics of a flexible financing policy? Select all that apply. Multiple select question. Periodic short-term financing Constant asset requirements Periodic periods of surplus cash Periodic investments in marketable securities What is a restrictive financing policy designed to fund? Multiple choice question. Only fixed asset demands Both year-round and seasonal asset demands The troughs of asset demand The peaks of asset demand Select all that apply Which of these are carrying costs? Select all that apply. Multiple select question. Incurring costs for replenishing inventory Renting a warehouse for inventory storage Losing a sale because credit sales are not permitted Paying for inventory insurance Select all that apply Which of these apply to a compromise financing policy as compared to either a restrictive or a flexible policy? Select all that apply. Multiple select question. Less investment in marketable securities than with a flexible policy Less total asset requirements than with a flexible policy Less long-term debt and equity financing than with a restrictive policy Less short-term financing than with a restrictive policy Select all that apply Which of these are shortage costs? Select all that apply. Multiple select question. Granting credit to a customer who then defaults on payment Losing a sale due to lack of inventory selection Gaining a customer by granting credit Forfeiting a quantity discount because the order size is too small Which one of these is generally an unsecured loan? Multiple choice question. Line of credit Field warehouse loan Blanket inventory loan Banker's acceptance In the real world, which one of these is the more common situation? Multiple choice question. All current assets are financed with current liabilities. Net working capital is negative. Current asset demands are steady and financed entirely with equity. Firms must finance some current assets with long-term debt and/or equity. How does a $10,000 line of credit work? Multiple choice question. $10,000 is borrowed in even increments over the course of the loan period The $10,000 must be taken as one lump-sum but can be repaid as desired as long as it is repaid within one year Borrow, repay, borrow, and repay as long as the maximum amount owed at any one time does not exceed $10,000 Borrow and repay as desired as long as the total sum of the borrowing does not exceed $10,000 during a calendar year A flexible financing policy is designed to finance which one of these? Multiple choice question. Fixed asset demand plus the minimum current asset demand Fixed asset demand plus the average current asset demand Fixed asset demand only Maximum fixed and current asset demand Your bank will lend you $10,000 at 8 percent interest with a compensating balance of $500. Payments are to be made annually over three years. How is the payment amount computed? Multiple choice question. N = 3; I = 8; PV = 10,500; FV = 0; CPT PMT N = 3; I = 8; PV = 0; FV = 10,500; CPT PMT N = 3; I = 8; PV = 0; FV = 10,000; CPT PMT N = 3; I = 8; PV = 10,000; FV = 0; CPT PMT Select all that apply Which of these are characteristics of a restrictive financing policy? Select all that apply. Multiple select question. Periods of excess cash A steady investment in marketable securities Seasonal asset demands which are excluded from long-term debt or equity financing Periods requiring short-term financing Select all that apply Which two of these do firms prefer to use as collateral for a short-term asset-based loan? Select two. Multiple select question. Inventory Equipment Accounts receivable Real estate Select all that apply Which of these are characteristics of a compromise financing policy? Select all that apply. Multiple select question. A higher level of long-term debt and equity financing than under a flexible financing policy Periods that provide for investment in marketable securities Partial funding of seasonal asset requirements with long-term debt and/or equity Periods that require short-term financing Select all that apply Which of these applies to accounts receivable factoring? Select all that apply. Multiple select question. Factoring occurs prior to the accounts receivables being due. The factor incurs the cost of any accounts which default. The selling firm is responsible for any account defaults. The time value of money is ignored. Which one of these is generally an unsecured loan? Multiple choice question. Commercial loan Asset-based loan Mortgage Accounts receivable assignment For which type of inventory loan does the borrowing firm get to retain both the ownership and possession of the inventory? Multiple choice question. Both blanket inventory and trust receipt loans Field warehouse loans only Trust receipt loans only Blanket inventory loan only Select all that apply Which of these help describe a line of credit arrangement? Select all that apply. Multiple select question. The lender may charge a commitment fee The borrower decides when a draw will be made If the lender charges a commitment fee, then no interest charges will be imposed. The borrower decides how much of the line to borrow at any one time Select all that apply Which entities issue commercial paper? Select all that apply. Multiple select question. Small corporations All sizes of banks Medium-to-large corporations Large banks A bank will loan you $150,000 with a $10,000 compensating balance or $140,000 with no compensating balance. The interest rate on the $140,000 loan is 7 percent. Both loans require annual payments over four years. What must the interest rate be on the $150,000 loan for the payments on both loans to be same? Multiple choice question. 9.24 percent 4.01 percent 6.33 percent 5.67 percent Reason: N = 4; I = 7; PV = 140,000; FV = 0; CPT PMT; PMT = -41,331.94 N = 4; PV = 150,000; PMT = -41,331.94; FV = 0; CPT I; I = 4.01 Which term refers to a firm's need to keep cash on hand to pay normal expenses such as utilities and wages? Multiple choice question. Compensating balance Investment opportunity Transaction facilitation Replenishment level Select all that apply Asset-based loans can be secured by which of these? Select all that apply. Multiple select question. Equipment Inventory Accounts receivable Equity shares Select all that apply Which of these correctly describe the Baumol model? Select all that apply. Multiple select question. The replenishment amount varies over time. The cash balance always increases from 0 to C*. Cash is replenished only when it declines to zero. The cash balance declines at a steady rate. How can the factoring of accounts receivable best be described? Multiple choice question. As the use of accounts receivable as collateral As an outright sale As a loan As a loan with the right of recourse How is the minimum level of cash established in the Miller-Orr model? Multiple choice question. The minimum level is set equal to the lowest cash balance over the past year. The minimum level is determined by the firm. The Miller-Orr formula computes the ideal minimum cash level. The minimum level of cash is set equal to zero. Select all that apply A blanket inventory loan has which of these characteristics? Select all that apply. Multiple select question. Lender owns the inventory A lien on all of a firm's inventory Lender takes possession of the inventory Borrowing firm owns the inventory Select all that apply Which of these Miller-Orr model variables are described correctly? Select all that apply. Multiple select question. σ2 = Variance in net daily cash flows F = The trading cost for marketable securities per transaction σ = Standard deviation in net daily cash flows H* = The optimal cash return point What is commercial paper? Multiple choice question. A type of SEC-registered security Unsecured, long-term debt A type of long-term bond A type of money-market security Which one of these is not considered by either the Baumol or the Miller-Orr models? Multiple choice question. A compensating balance requirement may be an average value, not a set minimum requirement. A firm may have a compensating balance requirement below which the firm's bank account may not fall. Firms prefer to avoid all short-term borrowing due to its cost. Transaction costs have risen noticeably since the models were created. Ken is a successful entrepreneur and the owner of a conglomerate. His firm always keeps extra cash on hand so Ken can expand the business if a good opportunity arises. This is an example of which reason to maintain a cash balance? Multiple choice question. Investment opportunity Compensating balance Safety stock Transaction facilitation What is the definition of float? Multiple choice question. The time period between a customer mailing a payment and the funds being available to the collecting firm The time period between a firm receiving a payment and the funds from that payment being available for use The time period between a customer mailing a payment and the payment being deposited in the collecting firm's bank The time period between a customer mailing a payment and the collecting firm receiving that payment Select all that apply Which of these are assumptions of the Baumol model? Select all that apply. Multiple select question. Cash inflows occur simultaneously with cash outflows. No cash inflows will occur during the period. A safety stock of cash must be maintained at all times. Firms have a constant, perfectly predictable cash disbursement rate. Which assumption does the Miller-Orr model make? Multiple choice question. All cash flows occur at the end of each period Cash inflows occur evenly over the period while outflows occur at the end of each period Cash outflows occur evenly over the period while inflows occur at the end of each period Daily cash inflows and outflows are normally distributed Which one of these is a legal method of slowing disbursements and requires the bank to show a payment request to the firm prior taking payment? Multiple choice question. Zero-balance account Lock-box account Concentration account Draf account Select all that apply Which of these are correct definitions of the Miller-Orr model variables? Select all that apply. Multiple select question. L = Lower control limit F = Flotation cost of new debt Z* = The upper limit for cash balances iday = Daily interest rate on marketable securities What is check kiting? Multiple choice question. The illegal act of drawing funds from an account when there are insufficient funds to cover the withdrawal Mailing a check for payment to a supplier from a bank located a long distance from that supplier to increase disbursement float Requiring customers to mail checks to various locations which are geographically disbursed Transferring funds electronically rather than by physical check Neither the Baumol nor the Miller-Orr model considers which one of these factors? Multiple choice question. Firms may need to sell marketable securities to replenish cash. Firms have the option of borrowing short-term funds. Cash inflows may occur on a daily basis. Firms may wish to maintain a minimum cash balance. Select all that apply Which of these are reasons why firms may sometimes have surplus cash? Select all that apply. Multiple select question. Saving for a major expenditure A bond issue was recently sold Seasonal fluctuations in sales and cash flows A major customer is late paying its bill A collecting firm has the most control over which portion of collection float? Multiple choice question. Mail float In-house processing float The collecting firm has little, if any, control over any portion of collection float. Availability float Which one of these is frequently used as an overnight investment for excess cash? Multiple choice question. Asset-backed security Repurchase agreement Accounts receivable assignment Treasury note The Baumol model works best for firms with which one of these characteristics? Multiple choice question. Steady daily cash inflows Fairly predictable cash outflows Cash inflows that are relatively similar in timing and size to cash outflows A minimum required cash balance > 0 Ron's Pin Striping has credit terms of 1/5, net 15. How are these terms interpreted? Multiple choice question. A discount of 1 percent is granted if payment made within 5 days, full payment due within 15 days. A discount of 5 percent is granted if payment is made within 1 day, full payment due within 15 days. A discount of 1/5th, or 20 percent, is granted if payment made at the time of sale, full payment due within 15 days. A discount of 1 percent is given if payment made within 15 days, otherwise a 5 percent interest rate will be charged. Select all that apply Which of these describe a zero-balance account? Select all that apply. Multiple select question. Requests for payment must be presented to the firm prior to the bank honoring that request. The account is a checking account for disbursing payments. Money is transferred in to the account only on days when checks are presented and only in the amount of those checks. The account has a zero balance at the end of every day. Select all that apply Which of the following are primary considerations in credit analysis? Select all that apply. Multiple select question. Borrower's expected future financial condition Borrower's age (Assume age > 21 years) Borrower's past payment history Borrower's current financial condition Which one of these has significantly reduced both availability float and check kiting? Multiple choice question. Jobs and Growth Tax Relief Reconciliation Act Check Clearing for the 21st Century Act North American Free Trade Agreement Securities Exchange Act Click and drag on elements in order List the steps of a common collection policy with the first step listed first. 1. Send letter 2. Call customer 3. Hire collection 4. Legal action Select all that apply Bob's Outlet is a major producer of children's toys. What does that fact alone indicate about the firm's cash flows? Select all that apply. Multiple select question. Bob's will have an increased supply of cash when retailers pay for their children's holiday toy purchases. Bob's cash flows will tend to be relatively even throughout the year since the firm is a producer, not a retailer. Bob's cash flows are affected by seasonality. Bob's is not expected to have cash surpluses. Select all that apply Which of these are money-market options for investing surplus cash? Select all that apply. Multiple select question. Banker's acceptances Treasury bills Commercial paper Treasury bonds Which one of these conditions is most apt to increase the credit period? Multiple choice question. A long-standing customer who is occasionally delinquent but always pays A new customer with a relatively small-sized order An outstanding established credit relationship with the seller A perishable type of product for which the credit sale is being granted How is credit analysis defined? Multiple choice question. A systematic determination of a borrower's ability and willingness to repay a potential loan A determination of the interest rate that should be applied to a particular loan A determination of the amount of money required to fund a particular project A listing of the credit period, cash discount, and type of credit instrument to be used Select all that apply Which of these statements related to a firm's collection policy are correct? Select all that apply. Multiple select question. Firms should attempt legal action before turning an account over to a collection agency. Sending delinquency letters tends to be less labor intensive than phone calls so letters are the first step. Firms may send more than one delinquency letter on the same past due bill. Firms should make multiple attempts to contact a delinquent account prior to turning the account over to a collection agency. [Show Less]
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