Midterm Flashcards
1
Q
- Like public companies, private companies can also use their stock price as a measure of performance.
a. True
b. False
A
False
2
Q
- The primary goal of any company should be to maximize current period profit.
a. True
b. False
A
False
3
Q
- An increase in inventories uses cash, reducing the firm’s net cash balance.
a. True
b. False
A
True
4
Q
- The statement of cash flows shows the firm’s cash inflows and outflows from operations as well as from its investments and financing activities.
a. True
b. False
A
True
5
Q
- The key to the banks’ ability to make illiquid loans is their ability to pool liquid deposits from thousands of depositors.
a. True
b. False
A
True
6
Q
- The payment of interest expense is considered a cash flow by a financing activity on the statement of cash flows.
a. True
b. False
A
False
7
Q
- An expenditure on new capital equipment is a cash payment.
a. True
b. False
A
True
8
Q
- The derivative market is also a source of financing for corporations.
a. True
b. False
A
False
9
Q
- Only the IPOs for large corporations are sold in primary markets.
a. True
b. False
A
False
10
Q
- In some ways the financing decision is less important than the investment decision.
a. True
b. False
A
True
11
Q
- A primary market would be utilized when:
a. Investors buy or sell existing securities
b. A commission must be paid on the transaction
c. Shares of common stock are exchanged
d. Securities are initially issued
A
d. Securities are initially issued
12
Q
- What is the marginal tax rate for a corporation with $60,000 of taxable income and an average tax rate of 18% if the next-lowest marginal tax rate of 15% covers taxable incomes up to $50,000?
a. 33%
b. 18%
c. 15%
d. 25%
A
a. 33%
13
Q
- Which of the following changes in working capital will result in an increase in cash flows?
a. Increase in accounts payable
b. Increase in inventories
c. Decrease in other current liabilities
d. Increase in accounts receivable
A
a. Increase in accounts payable
14
Q
- Which of the following forms of income can individuals defer from taxation?
a. Dividends
b. Realized capital gains
c. Unrealized capital gains
d. Interest
A
c. Unrealized capital gains
15
Q
- The primary distinction between securities sold in the primary and secondary markets is the:
a. Price of the securities
b. Previous issuance of the securities
c. Profitability of the issuing corporation
d. Riskiness of the securities
A
b. Previous issuance of the securities
16
Q
- One common reason for partnerships to convert to a corporate form of organization is that the partnership:
a. Agreement expires after ten years of use
b. Faces rapidly growing financing requirements
c. Wishes to avoid double taxation of profits
d. Has issued all of its allotted shares
A
b. Faces rapidly growing financing requirements
17
Q
- Which of the following statements correctly compares international accounting standards?
a. Balance sheets differ, but income statement are similar in all countries
b. The standards are becoming less similar over time
c. The standards are stricter in the United States in some regards
d. The standards are typically more lenient in the United States
A
c. The standards are stricter in the United States in some regards
18
Q
- The existence of goodwill on a corporate balance sheet indicates that the corporation has:
a. Been profitable in the past
b. Depreciated its tangible assets
c. Retained earnings resulting from past income
d. Intangible assets from past acquisitions
A
d. Intangible assets from past acquisitions
19
Q
- Long-term financing arrangements occur in the:
a. Capital markets
b. Primary markets
c. Money markets
d. Secondary markets
A
a. Capital markets
20
Q
- Corporations are referred to as public companies when their:
a. Shareholders have no tax liability
b. Shares are widely traded
c. Products or services are available to the public
d. Shares are held by the federal or state government
A
b. Shares are widely traded
21
Q
- Which one of these was a contributing factor to the need for many foreign banks to seek aid from their governments as a result of the financial crisis of 2007-2009?
a. Currency controls
b. Interest rate spikes
c. Decrease in their exchange rates
d. Investments in U.S. subprime mortgages
A
d. Investments in U.S. subprime mortgages
22
Q
- Insurance companies primarily reduce an individual’s risk by:
a. Spreading the risk across many individuals
b. Providing payment services
c. Transporting that risk forward in time
d. Providing low-interest-rate loans
A
a. Spreading the risk across many individuals
23
Q
- Net working capital is a measure of a company’s:
a. Goodwill
b. Estimated cash reservoir
c. Shareholders’ equity
d. Short-term liabilities
A
b. Estimated cash reservoir
24
Q
- If a firm pays taxes, which one of these will reduce net income but increase cash flow?
a. Interest expense
b. Depreciation expense
c. Cash sales
d. Income taxes
A
b. Depreciation expense
25
Q
- Which of the following is least likely to represent an agency problem?
a. Lavish spending on expense accounts
b. Plush remodeling of the executive suite
c. Executive incentive compensation plans
d. Excessive investment in “safe” projects
A
c. Executive incentive compensation plans
26
Q
- Which of the following function does not require financial markets?
a. Risk reduction by investment in diversified portfolios
b. Provision of liquidity
c. Provision of pricing information
d. Transporting of cash across time
A
d. Transporting of cash across time
27
Q
- If a payment of principal is due in 13 months on a long-term liability, that payment will now appear on the balance sheet as:
a. A current liability
b. Interest expense
c. Long-term debt
d. Cash
A
c. Long-term debt
28
Q
- What is the fundamental difference between IFRS and GAAP?
a. GAAP relies more on general principles as well as the spirit of those rules
b. GAAP relies more on general principles but ignores the spirit of those principles
c. GAAP relies more on specific rules but not the spirit of the rules
d. GAAP relies more on specific rules and the spirit of the rules
A
c. GAAP relies more on specific rules but not the spirit of the rules
29
Q
- Which of these transports income forward in time?
a. Credit card purchase
b. Retirement savings
c. Bank line of credit
d. Car loan
A
b. Retirement savings
30
Q
- Which of the following is not typically considered a function of financial intermediaries?
a. Providing a payment mechanism
b. Investing in real assets
c. Spreading or pooling risk among individuals
d. Accumulating funds from smaller investors
A
b. Investing in real assets
31
Q
- A perpetuity is a special form of an annuity.
a. True
b. False
A
a. True
32
Q
- If the market is efficient, stock prices should only be expected to react to new information that is released.
a. True
b. False
A
a. True
33
Q
- Credit risk implies that the promised yield to maturity on the bond is higher than the expected yield.
a. True
b. False
A
a. True
34
Q
- Compound interest pays interest for each time period on the original investment plus the accumulated interest.
a. True
b. False
A
a. True
35
Q
- Accrued interest declines with each payment on an amortizing loan.
a. True
b. False
A
a. True
36
Q
- An investor is faced with the decision of whether to invest in a stock with an expected return of 14% or a stock in the same industry with an expected 20% return. Which of the following seems most likely?
a. The 14% stock is overpriced
b. The 20% stock is a better investment
c. Both stocks will have approximately the same return
d. Both stocks are priced correctly given their perceived risk
A
d. Both stocks are priced correctly given their perceived risk
37
Q
- Depreciation (amortization) is:
a. Adjusted using time value of money
b. Adjusted for inflation and time value of money
c. Adjusted for inflation
d. Not adjusted for inflation
A
d. Not adjusted for inflation
38
Q
- The APR on a loan must be equal to the effective annual rate when:
a. The loan is for less than one year
b. Compounding occurs annually
c. Compounding occurs monthly
d. The loan is for more than one year
A
b. Compounding occurs annually
39
Q
- A fundamental analyst:
a. Believes that the market is strong-form efficient
b. Studies a firm’s financial statements to determine pricing inefficiencies
c. Relies upon the same information as the technical analyst, but believes in the random walk
d. Performs an unnecessary function, since markets are efficient
A
b. Studies a firm’s financial statements to determine pricing inefficiencies
40
Q
- An interest rate that has been annualized using compound interest is termed the:
a. Discounted interest rate
b. Annual percentage rate
c. Effective annual interest rate
d. Simple interest rate
A
c. Effective annual interest rate
41
Q
- Common stock can be valued using the perpetuity valuation formula if the:
a. Dividends are not expected to grow
b. Investor does not intend to sell the stock
c. Growth rate in dividends is not constant
d. Discount rate is expected to remain constant
A
a. Dividends are not expected to grow
42
Q
- The value of common stock will likely decrease if:
a. Dividends are discounted back to the present
b. The growth rate of dividends increases
c. The discount rate increases
d. The investment horizon decreases
A
c. The discount rate increases
43
Q
- The existence of an upward-sloping yield curve suggests that:
a. Interest rates will be increasing in the future
b. Bonds will not return as much as common stocks
c. Bonds should be selling at a discount to par value
d. Real interest rates will be increasing soon
A
a. Interest rates will be increasing in the future
44
Q
- As a project comes to its end, there is a disinvestment in working capital, which also generates positive cash flow as inventories are sold off and accounts receivable are collected.
a. True
b. False
A
a. True
45
Q
- Soft rationing should never cost the firm anything.
a. True
b. False
A
a. True
46
Q
- Upon the sale of equipment at the end of its useful life, tax liability will be incurred whenever the book value of the equipment exceeds the sales price.
a. True
b. False
A
b. False
47
Q
- When you finance a project partly with debt, you should still view the project as if it were all equity-financed, treating all cash outflows required for the project as coming from stockholders, and all cash inflows as going to them.
a. True
b. False
A
a. True
48
Q
- Unlike using IRR, selecting projects according to their NPV will always lead to a correct accept-reject decision.
a. True
b. False
A
a. True
49
Q
- As the opportunity cost of capital increases, the net present value of a project increases.
a. True
b. False
A
b. False
50
Q
- Supposed you finance a project partly with debt, you should neither subtract the debt proceeds from the required investment, not would you recognize the interest and principal payments on the debt as cash outflows.
a. True
b. False
A
a. True
51
Q
- In project analysis, allocations of overhead should be limited to only those that represent additional expense.
a. True
b. False
A
a. True
52
Q
- Projects with an NPV of zero decrease shareholders’ wealth by the cost of the project.
a. True
b. False
A
b. False
53
Q
- The total depreciation tax shield equals the product of depreciation and the tax rate.
a. True
b. False
A
a. True
54
Q
- How many IRRs are possible for the following set of cash flows? CF0 = -1,000, CF1 = +500, CF2 = -300, CF3 = +1,000, CF4 = +200.
a. 1
b. 4
c. 2
d. 3
A
d. 3
55
Q
- A project that increased sales was accompanied by a $50,000 increase in inventory, a $20,000 increase in accounts receivable, and a $25,000 increase in accounts payable. Assuming these amounts remain constant, by how much has net working capital increased?
a. $5,000
b. $25,000
c. $30,000
d. $45,000
A
d. $45,000
56
Q
- Which of the following statements is most likely to be correct for a project in which the NPV is negative when based on the inflows from net income?
a. NPV should be calculated with pre-tax cash flows
b. NPV may turn positive after adjusting for depreciation expense
c. NPV has probably been overestimated
d. The project should be rejected or abandoned
A
b. NPV may turn positive after adjusting for depreciation expense
57
Q
- If the adoption of a new product will reduce the sales of an existing product, then the:
a. Incremental benefits of the new product may be overestimated
b. Old product should be abandoned
c. New product should not be undertaken
d. Incremental benefits of the new product may be underestimated
A
a. Incremental benefits of the new product may be overestimated
58
Q
- What effect is expected at the end of the life of a project that initially required a $20,000 increase in net working capital?
a. The firm receives a $20,000 cash inflow
b. Taxable income is reduced by $20,000
c. No effects are expected from the sunk costs
d. The $20,000 must now be paid by the firm
A
a. The firm receives a $20,000 cash inflow
59
Q
- Assuming that an asset has been fully depreciated according to its straight line CCA class, which of the following statements is correct concerning the value of the asset:
a. Its book value is the current market value
b. Its market value is zero
c. Its UCC value is zero
d. It has neither book value nor market value
A
c. Its UCC value is zero
60
Q
- Which of the following should be assumed about a project that requires a $100,000 investment at time-period zero, then returns $20,000 annually for five years?
a. The profitability index is 1.0
b. The NPV is zero
c. The IRR is negative
d. The NPV is negative
A
d. The NPV is negative
61
Q
- Which of the following changes would be likely to increase the NPV of a project?
a. Increasing the project’s estimated expenses
b. Permitting a net decrease in working capital
c. Spreading the total cash inflows over a longer interval
d. Increasing the firm’s opportunity cost of capital
A
b. Permitting a net decrease in working capital
62
Q
- The present value at any given discount rate of the depreciation tax shield is:
a. Likely to increase annually due to inflation
b. Higher for the tenth year than the seven-year recovery period class
c. Higher with MACRS than straight-line depreciation
d. Equal for all depreciation methods
A
c. Higher with MACRS than straight-line depreciation
63
Q
- Firms that make investment decisions based upon the payback rule may be biased toward rejecting projects:
a. With short lives
b. With early cash inflows
c. That have negative NPVs
d. With long lives
A
d. With long lives
64
Q
- Firms favour assets with high CCA rates because:
a. It reduces the total amount of taxes paid over the projects life
b. They have longer economic lives
c. Their choice impacts project net present value favourably
d. They increase net accounting profits over the project’s life
A
c. Their choice impacts project net present value favourably
65
Q
- A tax shield loss is created upon the sale of an asset from a pool will occur whenever:
a. The corporation keeps two sets of books
b. The asset’s market value exceeds its book value
c. The asset has been partially depreciated
d. Salvage is greater than zero
A
d. Salvage is greater than zero
66
Q
- Which of the following is least likely to influence the opportunity cost of an asset?
a. The current demand for the asset
b. Its current book value
c. Its current market value
d. Alternative uses for the asset
A
b. Its current book value
67
Q
- Which of the following is representative of how depreciation expense is handled in the face of inflation?
a. The depreciable base is not altered by inflation
b. The real value of the depreciation is fixed
c. It increases annually with the rate of inflation
d. It decreases annually in nominal terms
A
a. The depreciable base is not altered by inflation
68
Q
- The opportunity cost of capital is equal to:
a. The return offered by other projects of equal risk
b. The discount rate that makes project NPV equal zero
c. The average rate of return for a firm’s projects
d. A project’s internal rate of return
A
a. The return offered by other projects of equal risk
69
Q
- If two projects offer the same, positive NPV, then:
a. They have the same payback period
b. They add the same amount to the value of the firm
c. They are mutually exclusive projects
d. They also have the same IRR
A
b. They add the same amount to the value of the firm
70
Q
- The discount rate used for calculating the NPV of an investment is determined by the ____ of the investment.
A
Risk
71
Q
- Since a risky dollar is worth less than a safe one, cash flows generated by more risky investments should be discounted at ____ cash flows generated by less risky investments.
A
A higher rate than
72
Q
- A payback period for a project can be defined as _________.
A
The length of time until you recover your initial investment
73
Q
- Which of the following are the limitations of the payback rule for accepting projects? Select all that apply.
a. The payback rule biases the firm against accepting long-term projects
b. The payback rule gives different weights to the cash flows arriving at different points in time before the cut off period
c. The payback rule considers cash flows even after the payback period
d. The payback rule gives equal weight to all cash flows before the cut off period
e. The payback rule does not consider cash flows after the payback period
A
a. The payback rule biases the firm against accepting long-term projects
d. The payback rule gives equal weight to all cash flows before the cut off period
e. The payback rule does not consider cash flows after the payback period
74
Q
- In choosing among mutually exclusive projects, a firm needs to choose the one that _____.
A
Offers the highest net present value (NPV)
75
Q
- Which of the following criteria tends to lead to the same decisions as net present value?
A
Internal rate of return
76
Q
- The _______ rule states that a firm should invest in any project whose rate of return is greater than the opportunity cost of capital.
A
Internal rate of return
77
Q
- In addition to net present value, which of the following criteria can be used when making investment decisions?
a. Treasure bill rate of return
b. Discounted payback
c. Payback
d. Internal rate of return
A
b. Discounted payback
c. Payback
d. Internal rate of return
78
Q
- The rate of return is the discount rate at which a project’s net present value equals zero.
a. True
b. False
A
True
79
Q
- Which of the following is discounted when calculating the net present value of a project?
A
Project incremental free cash flows
80
Q
- Which of the following are characteristics of sunk costs? Select all that apply.
a. They are past and irreversible cash outflows
b. Sunk cost should not be a consideration in project evaluation decision
c. They decrease the project net present value.
d. They increase the project net present value.
A
a. They are past and irreversible cash outflows
b. Sunk cost should not be a consideration in project
81
Q
- When calculating the present value of stream of cash inflows for a project, the ______ should be used as the discount rate.
A
Opportunity cost of capital
82
Q
- Which of the following are considered short-term liabilities? Select all that apply.
a. Accounts receivable
b. Inventories
c. Accounts payable
d. Taxes payable
e. Cash
A
c. Accounts payable
d. Taxes payable
83
Q
- The difference between the nominal discount rate and the real discount rate is _____.
A
The expected inflation
84
Q
- The cash flow from a project is calculated as _____.
A
Cash flow from investment in plant and equipment + cash flow from investment in working capital + cash flow from operations
85
Q
- A firm had net income last year of $1.2 million. Its depreciation expenses were $0.5 million, and its total cash flow was $1.2 million. What happened to net working capital during the year?
A
∆NWC = $0.5 million
Cash Flow = Net income + Depreciation – Increase in net working capital (NWC)
1.2 = 1.2 + 0.5 – ∆NWC
∆NWC = $0.5 million
