51 questions on finance | Business & Finance homework help

1) Which of the following is a reason why an expertise in international finance is important?

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A) Because the process of assessing risk among many countries is more difficult than assessing risk for a single country

B) Because financial regulatory rules and requirements differ from country to country

C) Because changes in economic conditions impact the relative values of currency among countries

D) All of the above are reasons for gaining expertise in international finance.

 

2) Financial assets that will mature within a year are bought and sold in the ________ market.

A) debt

B) capital

C) stock

D) money

 

3) ________ is the typical title of the corporate executive charged with determining the best repayment structure for borrowed funds to ensure timely repayment and sufficient cash for daily operations.

A) Chief Executive Officer (CEO)

B) Chief Financial Officer (CFO)

C) Chairman

D) Chief Operating Officer (COO)

 

4) A firm’s stock price most closely reflects which of the following?

A) Current interest rates

B) Expected future cash flows of the firm

C) The amount of debt held by the firm

D) None of the above

 

5) A ________ has limited liability, is a legal entity, and has the greatest potential to raise capital.

A) sole proprietorship

B) general partnership

C) limited partnership

D) corporation

 

6) Which of the statements below is FALSE?

A) The purpose of studying financial statements is to understand those portions of the statements that have relevance for financial decision making.

B) We need to understand how to interpret and use the information presented in financial statements to form a picture of the financial profile of the firm.

C) Accounting, it has been said, looks back to where a company has been — somewhat like looking through a rear view mirror.

D) Accounting and finance view the numbers in the same way.

 

7) Net income is ________.

A) the accounting profit from the operations of the company during the period

B) cash flow

C) the accounting profit from the non-operating assets of the company during the period

D) always the dividends paid shareholders

 

8) Which of the statements below is FALSE?

A) The cash account is much like your individual checkbook, because it tells you how much money you currently have for paying bills or spending on new items.

B) Long-term assets are accounts that will normally be turned into cash over the course of the operating or business cycle of the firm, and current liabilities are the accounts that will come due for payment over the operating or business cycle.

C) The long-term capital asset accounts of the balance sheet represent the capital investment of the company and reflect assets that the company owns and that provide the basis for producing goods and services for sale.

D) The Plant, Property and Equipment account is straightforward in its description, yet it really contains two pieces: the original value (purchase price) of the equipment and the accumulated depreciation.

 

9) Free cash flow is the ________.

A) cash flow from assets.

B) the remaining cash free to distribute to creditors and owners of the firm

C) cash that a a company generates to to operate the company

D) All of the above

 

10) The SEC has a site named EDGAR that ________.

A) provides, at a cost, on-line access to a company’s financial reports

B) offers investors free advice on what stocks to pick

C) provides an on-line tutorial on how to understand the government’s role in affecting stock prices

D) provides an on-line tutorial that will help new viewers find a company and its financial statements

 

11) Steve would like to buy a new car but must complete a two-year commitment to the Peace Corp before he will drive the new car. The current price of the car Steve wants to buy is $22,000, and the dealer expects the price of a similar new car to be $24,000 in two years. If Steve can earn an annual interest rate of 3% on his money, should he buy the car now or wait for two years? Note: Storage costs if Steve purchases the car are $0.  Please limit your considerations to the factors offered in the answer choices.

A) Buy now because if Steve invests the $22,000 today it will only increase in value to $23,340, and this is less than the cost of his desired new car in two years.

B) Steve is indifferent because his $22,000 investment will be worth exactly $24,000 after two years.

C) Buy in two years because at $24,000 the car will cost less than the $24,385 Steve will have after investing the money for two years.

D) Buy in two years because $24,000 is a real deal for the car Steve wants.

 

12) A home improvement firm has quoted a price of $9,800 to fix up John’s backyard. Five years ago, John put $7,500 into a home improvement account that has earned an average of 5.25% per year. Does John have enough money in his account to pay for the backyard fix-up?

A) Yes; John now has exactly $9,800 in his home improvement account.

B) No; John has only $9,687 in his home improvement account.

C) Yes; John now has $10,519 in his home improvement account.

D) There is not enough information to answer this question.

 

13) You have purchased a Treasury bond that will pay $10,000 to your newborn child in 15 years. If this bond is discounted at a rate of 3.875% per year, what is today’s price (present value) for this bond?

A) $8,417

B) $8,500

C) $5,654

D) $10,000

 

14 Your parents plan to spend $20,000 on a car for you upon graduation from college. If you will graduate in three years and your parents can earn 4.125% annually on their investment, how much money must they set aside today for your car?

A) $20,000

B) $17,704

C) $17,716

D) $16,387

 

15) Four years ago, Robert’s annual salary was $52,500. Today, he earns $73,800. What has been the average annual rate of growth of Robert’s salary?

A) $5,325 per year

B) 10.38%

C) 41.52%

D) 8.89%

 

16) In 1930, the highest paid player in major league baseball was Babe Ruth of the New York Yankees, with an annual salary of $80,000. In 2005, the highest paid player in major league baseball player was Alex Rodriguez, also of the New York Yankees, with a salary of $25,000,000. What was the average annual rate of growth in the top baseball salary over this time period?

A) 7.96%

B) 18.70%

C) 3.31%

D) 4.17%

 

17) Your employer has agreed to place year-end deposits of $1,000, $2,000 and $3,000 into your retirement account. The $1,000 deposit will be one year from today, the $2,000 deposit two years from today, and the $3,000 deposit three years from today. If your account earns 5% per year, how much money will you have in the account at the end of year three when the last deposit is made?

A) $5,357.95

B) $6,000

C) $6,202.50

D) $6,727.88

 

18) Which of the following is greater (answers rounded to the nearest cent)?

A) An ordinary annuity of $100.00 per year for three years discounted at 10% per year

B) A present value of $248.69

C) A future value of $331.00 three years from today, given an interest rate of 10% per year

D) You would be indifferent to the three choices since they all have the same present value when using an interest rate of 10% per year.

 

19) You have the opportunity to purchase mineral rights to a property in North Dakota with expected annual cash flows of $10,000 per year for eight years. If you discount these cash flows at a rate of 12% per year, what are these cash flows worth today if the cash flows occur at the end of each period?

A) $55,637.57

B) $49,676.40

C) $80,000.00

D) $122,996.93

 

20) A series of equal periodic finite cash flows that occur at the beginning of the period are known as a/an ________.

A) ordinary annuity

B) annuity due

C) perpetuity

D) amortization

 

21) Suppose you invest $3,500 today, compounded semiannually, with an annual interest rate of 8.50%. What amount of interest will you earn in one year?

A) $303.82

B) $307.12

C) $309.13

D) $313.82

 

22) What is the EAR if the APR is 5% and compounding is quarterly?

A) Slightly above 5.09%

B) Slightly below 5.09%

C) Under 5.00%

D) Over 5.25%

 

23) You put down 20% on a home with a purchase price of $300,000. The down payment is thus $60,000, leaving a balance owed of $240,000. The bank will loan you the remaining balance at 4.28% APR. You will make annual payments with a 20-year payment schedule. What is the annual annuity payment under this schedule?

A) $18,100.23

B) $22,625.29

C) $12,000.00

D) $33,785.23

 

24) Nominal interest rates are the sum of two major components. These components are ________.

A) the real interest rate and expected inflation

B) the risk-free rate and expected inflation

C) the real interest rate and default premium

D) the real interest rate and the T-bill rate

 

25) The ________ compensates the investor for the additional risk that the loan will not be repaid in full.

A) default premium

B) inflation premium

C) real rate

D) interest rate

 

26) Which of the statements below is FALSE?

A) If you invest money for a short period and buy a six-month CD, you will not receive as high an interest rate as if you bought a CD with a longer maturity period.

B) The difference in rates as the borrowing time or investment horizon increases is due to the maturity premium of the investments.

C) The maturity premium represents that portion of the yield that compensates the investor for the additional waiting time or the lender for the additional time it takes to receive repayment in full.

D) The longer the loan, the greater the risk of nonpayment and the lower the interest rate the lender demands.

 

27) If we want to get some idea about a(n) ________ over time between two specific assets, we can compare the returns on top-rated corporate bonds and U.S. government bonds.

A) inflation premium

B) default premium

C) maturity premium

D) liquidity premium

 

28) A bond is a ________ instrument by which a borrower of funds agrees to pay back the funds with interest on specific dates in the future.

A) long-term equity

B) long-term debt 

C) short-term debt

D) short-term equity

 

29) The ________ is the yield an individual would receive if the individual purchased the bond today and held the bond to the end of its life.

A) current yield

B) yield to maturity

C) prime rate

D) coupon rate

 

30) Blackburn Inc. has issued 30-year $1,000 face value, 10% annual coupon bonds, with a yield to maturity of 9.0%. The annual interest payment for the bond is ________.

A) $100

B) $90

C) $50

D) $45

 

31) The difference between the price and the par value of a zero-coupon bond represents ________.

A) taxes payable by the bond buyer

B) the accumulated principal over the life of the bond

C) the bond premium

D) the accumulated interest over the life of the bond

 

32) When the ________ is less than the yield to maturity, the bond sells at a/the ________ the par value.

A) coupon rate, premium over

B) coupon rate, discount to

C) time to maturity, discount to

D) time to maturity, same price as 

 

33) Which of the following types of bonds may the issuer buy back before maturity?

A) Callable bond

B) Putable bond

C) Convertible bond

D) Zero-coupon bond

 

34) Stocks differ from bonds because:

A) bond cash flows are known while stock cash flows are uncertain.

B) firms pay bond cash flows prior to paying taxes while stock cash flows are after tax.

C) the ending par value of a bond is known at purchase while the ending value of a share of stock is unknown at purchase.

D) of all of the above.

 

 

35) Which of the following statements is TRUE?

A) The dealers of stock are not allowed to make money on the difference between what they buy the stock for and what they sell it for. 

B) A bear market is a prolonged rising market, one in which stock prices in general are increasing.

C) The ask price is the price at which a dealer is willing to sell, and the bid price is the price at which a dealer is willing to buy.

D)  A bull market is a prolonged declining market, one in which stock prices in general are decreasing.

 

36) The value of a financial asset is the ________.

A) present value of all of the future cash flows that will be received

B) sum of all previous cash flows received

C) future value of just the capital gains but not the dividends

D) present value of just the capital gains but not the dividends

 

37) You want to invest in a stock that pays $6.00 annual cash dividends for the next five years. At the end of the five years, you will sell the stock for $30.00. If you want to earn 10% on this investment, what is a fair price for this stock if you buy it today?

A) $41.37

B) $40.37

C) $22.75

D) $18.63

 

38) The next dividend (Div1) is $1.80, the growth rate (g) is 6%, and the required rate of return (r) is 12%. What is the stock price, according to the constant growth dividend model?

A) $31.80

B) $30.80

C) $30.00

D) $15.00

 

39) Strong-form efficient markets theory proclaims that ________.

A) one can chart historical stock prices to predict future stock prices such that you can identify mispriced stocks and routinely outperform the market

B) one can exploit publicly available news or financial statement information to routinely outperform the market

C) current prices reflect the price and volume history of the stock, all publicly available information, and all private information

D) current prices reflect the price and volume history of the stock, all publicly available information, but no private information

 

40) ________ may be defined as a measure of uncertainty in a set of potential outcomes for an event in which there is a chance for some loss.

A) Diversification

B) Risk

C) Uncertainty

D) Collaboration

 

41) The practice of not putting all of your eggs in one basket is an illustration of ________.

A) variance

B) diversification

C) portion control

D) expected return

 

42) Which of the following classifications of securities had the largest range of annual returns over the period 1950-1999?

A) Large-company stocks

B) Long-term government bonds

C) Small-company stocks

D) 3-month U.S. Treasury bills

 

43) Historically, the ________ risk an investor is willing to accept the ________ the potential return for the investment

A) more, lesser

B) less, greater

C) more, greater

D) Historically, the risk/return tradeoff has not played out in any particular manner.

 

44) Which of the following statements is true about variance?

A) Variance describes how spread out a set of numbers or values is around its mean or average.

B) Variance is essentially the variability from the average.

C) The larger the variance, the greater the dispersion.

D) All of the above statements are true.

 

45) The primary benefit of diversification is:

A) an increase in expected return.

B) an equal reduction in risk and return.

C) a reduction in risk.

D) diversification has no real benefit; it is a shell game promoted by investment advisors who are the only real winners.

 

46) The type of risk that can be diversified away is called ________.

A) unsystematic risk

B) systematic risk

C) nondiversifiable risk

D) system-wide risk

 

47) Beta is ________.

A) a measure of systematic risk

B) a measure of nondiversifiable risk

C) the appropriate measure of risk for a well-diversified portfolio

D) All of the above

 

48) Which of the statements below is FALSE?

A) Financial statements are a collection of historical and current activities of the company. 

B) The collection of value over time found in financial statements requires us to pay attention to how we construct financial ratios so as to glean information for analysis. 

C) All financial statements are constructed with the same accounting principles, so you can always compare different firms based solely on these statements.

D) We want to analyze financial statements so as to compare different companies and their performance relative to our company.

 

49) The revenue is $40,000, the cost of goods sold is $26,000, the selling, general and administrative expenses are $7,000, interest expense is $2,000, and depreciation is $3,000. What is the EBIT?

A) $2,000

B) $4,000

C) $7,000

D) $14,000

 

50) Comparing two companies using ________ may point out differences in management styles.

A) common-size financial statements

B) sales growth

C) historical share prices

D) earnings per share

 

51) Return on equity can increase as a result of an increase in which of the following ratios?

A) Net income/ sales

B) Sales/ total assets

C) Total assets/ equity

D) All of the above will have a positive influence on the ROE.