## Description

Corporate Finance Stephen Ross 12th Edition- Test Bank

**Sample Questions**

**Instant Download With Answers**

**Chapter 2 Financial Statements and Cash Flow**

** **

1) Which one of these accounts appears on the right-hand side of a balance sheet?

- A) Property, plant, and equipment
- B) Accumulated retained earnings
- C) Accumulated depreciation
- D) Cash and equivalents
- E) Intangible assets

Answer: B

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Balance sheet

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

2) The entire book value of the residual ownership of a corporation is known as the:

- A) total equity.
- B) intangible assets.
- C) retained earnings.
- D) capital surplus.
- E) total assets.

Answer: A

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Balance sheet

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

3) Which account represents the book value of all of a corporation’s net profits less its dividend payments?

- A) Capital surplus
- B) Accumulated retained earnings
- C) Treasury stock
- D) Common stock
- E) Preferred stock

Answer: B

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Balance sheet

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

4) Which one of the following is a current liability?

- A) Amount due to a supplier in 18 months
- B) Note payable in nine months
- C) Estimated taxes just paid
- D) Loan payment due in 13 months
- E) Amount due from a customer in 30 days

Answer: B

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Balance sheet

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

5) An increase in total assets:

- A) means that net working capital is also increasing.
- B) requires an investment in fixed assets.
- C) means that stockholders’ equity must also increase.
- D) must be offset by an equal increase in liabilities and stockholders’ equity.
- E) can only occur when a firm has positive net income.

Answer: D

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Balance sheet

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

6) Which one of the following assets is generally the most liquid?

- A) Inventory
- B) Buildings
- C) Accounts receivable
- D) Equipment
- E) Patents

Answer: C

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Liquidity

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

7) Which one of the following statements concerning liquidity is correct?

- A) Liquid assets generally earn higher rates of return than fixed assets.
- B) If you can sell an asset next year at a price equal to its actual value, the asset is highly liquid.
- C) Liquid assets are defined as those assets obtained within the past year.
- D) The less liquidity a firm has, the lower the probability the firm will encounter financial difficulties.
- E) Balance sheet accounts are listed in order of decreasing liquidity.

Answer: E

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Liquidity

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

8) Liquidity is:

- A) a measure of the use of debt in a firm’s capital structure.
- B) equal to current assets minus current liabilities.
- C) equal to the market value of a firm’s total assets minus its total liabilities.
- D) valuable to a firm even though liquid assets tend to be less profitable to own.
- E) generally most associated with intangible assets.

Answer: D

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Liquidity

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

9) Which one of the following accounts is included in stockholders’ equity?

- A) Long-term debt
- B) Deferred taxes
- C) Plant and equipment
- D) Accumulated retained earnings
- E) Dividends paid

Answer: D

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Balance sheet

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

10) Book value:

- A) is equivalent to market value for firms with fixed assets.
- B) is based on historical cost.
- C) generally tends to exceed market value when fixed assets are included.
- D) is more of a financial than an accounting valuation.
- E) is adjusted whenever the market value of an asset changes.

Answer: B

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Market and book values

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

11) If you sell an asset, you are most apt to receive which value for that asset?

- A) Market value
- B) Original cost minus accumulated depreciation
- C) Historical value
- D) Book value
- E) Carrying value

Answer: A

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Market and book values

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

12) Which one of these equations is an accurate expression of the balance sheet?

- A) Assets ≡ Liabilities − Stockholders’ equity
- B) Stockholders’ equity ≡ Assets + Liabilities
- C) Liabilities ≡ Stockholders’ equity − Assets
- D) Assets ≡ Stockholders’ equity − Liabilities
- E) Stockholders’ equity ≡ Assets − Liabilities

Answer: E

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Balance sheet

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

13) Which one of these accounts is classified as a fixed asset on the balance sheet?

- A) Intangible assets
- B) Accounts payable
- C) Preferred stock
- D) Inventory
- E) Accounts receivable

Answer: A

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Balance sheet

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

14) On a balance sheet, deferred taxes are classified as:

- A) stockholders’ equity.
- B) a current asset.
- C) a long-term liability.
- D) a fixed asset.
- E) a current liability.

Answer: C

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Balance sheet

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

15) If a firm’s financial managers successfully meet their primary goal, then the firm’s:

- A) debts will exceed its equity.
- B) market value will exceed its book value.
- C) net working capital will exceed its long-term debt.
- D) carrying value will exceed its market value.
- E) equity will exceed its assets.

Answer: B

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Market and book values

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

16) An asset that can be quickly converted into cash without significant loss in value is referred to as being:

- A) marketable.
- B) tangible.
- C) intangible.
- D) liquid.
- E) fixed.

Answer: D

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Liquidity

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

17) Which one of these is related to an increase in the book value of the stockholders’ equity in a profitable, non-dividend paying firm? Assume no shares of stock are repurchased or sold.

- A) A decrease in the book value of inventory
- B) An increase in earnings per share
- C) An increase in the market value of the firm’s buildings
- D) An increase in the market value of the firm’s long-term debt
- E) An increase in non-cash expenses

Answer: B

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Market and book values

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

18) Assets are listed on the balance sheet in order of:

- A) decreasing liquidity.
- B) acquisition.
- C) increasing size.
- D) market value relative to book value.
- E) book value.

Answer: A

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Liquidity

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

19) An increase in treasury stock:

- A) increases the total equity of the firm.
- B) is the result of a firm issuing new shares of stock to the federal government.
- C) increases the number of shares outstanding.
- D) results from a repurchase of outstanding shares of stock.
- E) requires repayment at some point in the future.

Answer: D

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Balance sheet

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

20) The book value of assets:

- A) is determined under Generally Accepted Accounting Principles (GAAP) and is based on the cost of those assets.
- B) represents the true market value of those assets according to GAAP.
- C) is always the best measure of the company’s value to an investor.
- D) is always higher than the replacement cost of the assets.
- E) is shown on the firm’s income statement.

Answer: A

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Generally Accepted Accounting Principles (GAAP)

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

21) Under Generally Accepted Accounting Principles (GAAP), a firm’s assets are reported at:

- A) market value.
- B) liquidation value.
- C) market value less accumulated depreciation.
- D) historical cost less accumulated depreciation.
- E) liquidation value less accumulated depreciation.

Answer: D

Difficulty: 1 Easy

Section: 2.1 The Balance Sheet

Topic: Generally Accepted Accounting Principles (GAAP)

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

22) The income statement:

- A) measures performance for one specific day.
- B) ignores any income other than operating revenues.
- C) excludes deferred tax expense.
- D) treats dividends paid as a cash expense.
- E) includes noncash expenses.

Answer: E

Difficulty: 1 Easy

Section: 2.2 The Income Statement

Topic: Income statement

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

23) According to Generally Accepted Accounting Principles (GAAP), revenue is recognized as income when:

- A) a contract is signed to perform a service or deliver a good.
- B) the transaction is complete and the goods or services are delivered.
- C) payment is requested.
- D) income taxes are paid on the revenue earned.
- E) managers decide to recognize it.

Answer: B

Difficulty: 1 Easy

Section: 2.2 The Income Statement

Topic: Generally Accepted Accounting Principles (GAAP)

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

24) The financial statement summarizing a firm’s accounting performance over a period of time is the:

- A) income statement.
- B) balance sheet.
- C) statement of cash flows.
- D) tax reconciliation statement.
- E) statement of equity.

Answer: A

Difficulty: 1 Easy

Section: 2.2 The Income Statement

Topic: Income statement

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

25) Noncash items refer to:

- A) the credit sales of a firm.
- B) the accounts payable of a firm.
- C) the costs incurred for the purchase of intangible fixed assets.
- D) expenses charged against revenues that do not directly affect cash flow.
- E) all accounts on the balance sheet other than cash on hand.

Answer: D

Difficulty: 1 Easy

Section: 2.2 The Income Statement

Topic: Noncash items

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

26) For a firm with long-term debt, net income must be equal to:

- A) Pretax income − Interest expense − Taxes.
- B) EBIT − Taxes.
- C) Taxes + Addition to retained earnings.
- D) Operating income × (1 − Marginal tax rate).
- E) Dividends + Addition to retained earnings.

Answer: E

Difficulty: 1 Easy

Section: 2.2 The Income Statement

Topic: Income statement

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

27) As seen on the income statement of a tax-paying firm:

- A) interest is deducted from income and increases the total taxes incurred.
- B) the tax rate is applied to the earnings before interest and taxes when the firm pays interest.
- C) depreciation is shown as an expense but does not affect the tax expense.
- D) depreciation reduces both the pretax income and the net income.
- E) interest expense is added to earnings before interest and taxes to compute pretax income.

Answer: D

Difficulty: 1 Easy

Section: 2.2 The Income Statement

Topic: Income statement

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

28) All else held constant, the earnings per share will decrease as the:

- A) net income increases.
- B) number of shares outstanding increases.
- C) total revenue of the firm increases.
- D) tax rate decreases.
- E) costs decrease.

Answer: B

Difficulty: 1 Easy

Section: 2.2 The Income Statement

Topic: Per-share valuations

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

29) Which one of these statements is correct?

- A) Pretax income is equal to net income minus taxes.
- B) The addition to retained earnings is equal to net income plus dividends.
- C) Operating income is equal to operating revenue minus cost of goods sold.
- D) Only current taxes are included in the tax expense.
- E) Earnings per share can be negative but dividends per share cannot.

Answer: E

Difficulty: 1 Easy

Section: 2.2 The Income Statement

Topic: Per-share valuations

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

30) Earnings per share:

- A) will increase if net income increases and the number of shares outstanding decreases.
- B) will increase if net income decreases and the number of shares outstanding increases.
- C) is defined as the addition to retained earnings divided by the number of shares outstanding.
- D) is the total amount of dividends paid per year on a per share basis.
- E) must increase at the same rate as the net income.

Answer: A

Difficulty: 1 Easy

Section: 2.2 The Income Statement

Topic: Per-share valuations

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

31) Earnings per share will increase when:

- A) depreciation decreases.
- B) the number of shares outstanding increase.
- C) operating income decreases.
- D) dividends per share decrease.
- E) the average tax rate increases.

Answer: A

Difficulty: 1 Easy

Section: 2.2 The Income Statement

Topic: Per-share valuations

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

32) Assuming the number of shares outstanding and total earnings remains constant, an increase in dividends per share will:

- A) reduce the earnings per share.
- B) reduce the addition to retained earnings.
- C) reduce net income.
- D) increase total equity.
- E) increase total assets.

Answer: B

Difficulty: 1 Easy

Section: 2.2 The Income Statement

Topic: Per-share valuations

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

33) Which one of these is a non-cash item?

- A) Deferred taxes
- B) Interest expense
- C) Current taxes
- D) Dividends
- E) Selling expenses

Answer: A

Difficulty: 1 Easy

Section: 2.2 The Income Statement

Topic: Noncash items

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

34) For a tax-paying firm, an increase in the depreciation expense of $1 will:

- A) reduce net income by $1.
- B) increase net income by $1.
- C) reduce net income by more than $1.
- D) reduce net income by less than $1.
- E) increase net income by less than $1.

Answer: D

Difficulty: 1 Easy

Section: 2.2 The Income Statement

Topic: Noncash items

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

35) According to Generally Accepted Accounting Principles (GAAP), the cost of goods sold expenses are:

- A) recorded as incurred.
- B) recorded when paid.
- C) matched with revenues.
- D) matched with production levels.
- E) expensed as management desires.

Answer: C

Difficulty: 1 Easy

Section: 2.2 The Income Statement

Topic: Generally Accepted Accounting Principles (GAAP)

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

36) Depreciation for a profitable firm:

- A) decreases both operating and net income.
- B) increases the net fixed assets as shown on the balance sheet.
- C) reduces both the net fixed assets and the costs of a firm.
- D) is a non-cash expense which increases the net operating income.
- E) decreases net fixed assets, net income, and operating cash flows.

Answer: A

Difficulty: 1 Easy

Section: 2.2 The Income Statement

Topic: Noncash items

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

37) Which one of these is most apt to be a fixed, cash expense in the short run?

- A) Raw materials cost
- B) Bond interest
- C) Commissions paid to sales representatives
- D) Depreciation
- E) Manufacturing labor costs

Answer: B

Difficulty: 1 Easy

Section: 2.2 The Income Statement

Topic: Fixed and variable costs

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

38) When you are making a financial decision, the most relevant tax rate is the ________ rate when the tax rate schedule is progressive.

- A) average
- B) fixed
- C) marginal
- D) total
- E) variable

Answer: C

Difficulty: 1 Easy

Section: 2.3 Taxes

Topic: Taxes

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

39) Which term defines the tax rate that applies to the next dollar of taxable income earned?

- A) Deductible
- B) Residual
- C) Total
- D) Average
- E) Marginal

Answer: E

Difficulty: 1 Easy

Section: 2.3 Taxes

Topic: Taxes

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

40) As of 2018, the U.S. corporate tax rate is:

- A) based on a progressive tax rate schedule.
- B) based on a tiered, multi-rate flat tax.
- C) a flat tax of 34 percent.
- D) zero with all corporate taxable income passed to shareholders.
- E) a flat rate of 21 percent.

Answer: E

Difficulty: 1 Easy

Section: 2.3 Taxes

Topic: Taxes

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

41) A firm starts its year with positive net working capital. During the year, the firm acquires more short-term debt than it does short-term assets. This means that:

- A) the ending net working capital must be negative.
- B) both accounts receivable and inventory decreased during the year.
- C) the beginning current assets were less than the beginning current liabilities.
- D) accounts payable increased and inventory decreased during the year.
- E) the ending net working capital can be positive, negative, or equal to zero.

Answer: E

Difficulty: 1 Easy

Section: 2.4 Net Working Capital

Topic: Net working capital

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

42) For a growing firm, the change in net working capital is generally:

- A) positive.
- B) negative.
- C) highly erratic.
- D) highly negative.
- E) equal to zero.

Answer: A

Difficulty: 1 Easy

Section: 2.4 Net Working Capital

Topic: Net working capital

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

43) An increase in which one of the following will cause the operating cash flow to increase for a profitable firm?

- A) Depreciation
- B) Cash
- C) Net working capital
- D) Taxes
- E) Administrative expenses

Answer: A

Difficulty: 1 Easy

Section: 2.5 Cash Flow of the Firm

Topic: Operating cash flow

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

44) Which one of these does *not* affect the cash flow to creditors?

- A) Interest paid on long-term debt
- B) New mortgage on a building
- C) Increase in accounts payable
- D) Mortgage interest payment
- E) Reduction in long-term debt

Answer: C

Difficulty: 1 Easy

Section: 2.5 Cash Flow of the Firm

Topic: Cash flow to creditors

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

45) A firm’s dividend payments less any net new equity raised is referred to as the firm’s:

- A) operating cash flow.
- B) capital spending.
- C) net working capital.
- D) cash flow from creditors.
- E) cash flow to stockholders.

Answer: E

Difficulty: 1 Easy

Section: 2.5 Cash Flow of the Firm

Topic: Cash flow to stockholders

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

46) Which one of these will cause an increase in the cash flow to creditors for the current year?

- A) Collection of a refund for the overpayment of a loan
- B) Payoff of a 36-month loan after the first 15 months
- C) Payment of a late charge on an account payable to a supplier
- D) Acquiring a new loan that will be repaid in one lump sum 24 months from now
- E) Purchasing inventory using credit offered by a supplier

Answer: B

Difficulty: 1 Easy

Section: 2.5 Cash Flow of the Firm

Topic: Cash flow to creditors

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

47) The cash flow to stockholders must be positive when:

- A) the dividends paid are less than the amount of net new equity raised.
- B) the net sale of common stock exceeds the amount of dividends paid.
- C) no income is distributed but new shares of stock are sold.
- D) the cash flow from assets is positive and exceeds the cash flow to creditors.
- E) both the cash flow to assets and the cash flow to creditors are positive.

Answer: D

Difficulty: 1 Easy

Section: 2.5 Cash Flow of the Firm

Topic: Cash flow to stockholders

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

48) Cash flow from assets:

- A) equals net income plus non-cash items.
- B) can be positive, negative, or equal to zero.
- C) equals operating cash flow minus net capital spending.
- D) equals the addition to retained earnings.
- E) equals operating cash flow minus the cash flow to creditors.

Answer: B

Difficulty: 1 Easy

Section: 2.5 Cash Flow of the Firm

Topic: Cash flow from assets

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

49) Net capital spending is equal to the:

- A) net change in total assets plus depreciation.
- B) net change in fixed assets plus depreciation.
- C) net income plus depreciation.
- D) difference between the market and book values of the total assets.
- E) change in total assets.

Answer: B

Difficulty: 1 Easy

Section: 2.5 Cash Flow of the Firm

Topic: Cash flow from assets

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

50) Cash flow to stockholders is defined as:

- A) cash dividends paid.
- B) repurchases of equity less new equity sold minus cash dividends paid.
- C) cash flow from financing less cash flow to creditors.
- D) cash dividends paid plus repurchases of equity minus new equity financing.
- E) cash flow from assets plus cash flow to creditors.

Answer: D

Difficulty: 1 Easy

Section: 2.5 Cash Flow of the Firm

Topic: Cash flow to stockholders

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

51) Free cash flow is:

- A) the money generated from the sale of new shares of stock.
- B) another term for operating cash flow.
- C) the cash generated by decreasing net working capital.
- D) cash that the firm can distribute to creditors and stockholders.
- E) the net income of a firm after taxes have been paid.

Answer: D

Difficulty: 1 Easy

Section: 2.5 Cash Flow of the Firm

Topic: Free cash flow

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

52) The cash flow of the firm must be equal to the:

- A) cash flow to stockholders minus the cash flow to creditors.
- B) cash flow to creditors minus the cash flow to stockholders.
- C) cash flow to governments plus the cash flow to stockholders.
- D) cash flow to stockholders plus the cash flow to creditors.
- E) aftertax operating cash flow.

Answer: D

Difficulty: 1 Easy

Section: 2.5 Cash Flow of the Firm

Topic: Cash flow from assets

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

53) The cash flow resulting from a firm’s ongoing, normal business activities is referred to as the:

- A) operating cash flow.
- B) net capital spending.
- C) additions to net working capital.
- D) free cash flow.
- E) cash flow to investors.

Answer: A

Difficulty: 1 Easy

Section: 2.5 Cash Flow of the Firm

Topic: Operating cash flow

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

54) Capital spending is equal to:

- A) ending net fixed assets minus beginning net fixed assets.
- B) ending net fixed assets minus beginning net fixed assets plus depreciation.
- C) ending total assets minus beginning total assets.
- D) ending total assets minus beginning total assets plus depreciation.
- E) beginning total assets plus asset purchases minus asset sales.

Answer: B

Difficulty: 1 Easy

Section: 2.5 Cash Flow of the Firm

Topic: Capital spending

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

55) Operating cash flow is defined as:

- A) Pretax income − Taxes.
- B) Net income − Dividends.
- C) EBIT + Depreciation − Taxes.
- D) Pretax income + Depreciation.
- E) Cash flow to investors + Taxes.

Answer: C

Difficulty: 1 Easy

Section: 2.5 Cash Flow of the Firm

Topic: Operating cash flow

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

56) Payments to creditors that include interest and the repayment of principal are referred to as:

- A) the cash flow to stockholders.
- B) the reduction in net working capital.
- C) debt service.
- D) operating cash flow.
- E) the change in net working capital.

Answer: C

Difficulty: 1 Easy

Section: 2.5 Cash Flow of the Firm

Topic: Operating cash flow

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

*Corporate Finance, 12e *(Ross)

**Chapter 4 Discounted Cash Flow Valuation**

** **

1) The net present value of a project is equal to the:

- A) present value of the future cash flows.
- B) present value of the future cash flows minus the initial cost.
- C) future value of the future cash flows minus the initial cost.
- D) future value of the future cash flows minus the present value of the initial cost.
- E) sum of the project’s anticipated cash inflows.

Answer: B

Difficulty: 1 Easy

Section: 4.1 Valuation: The One-Period Case

Topic: Net present value

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

2) Which one of these statements is correct concerning the time value of money?

- A) Increasing the initial cost of a project increases the project’s NPV.
- B) Increasing the discount rate, increases the PV of a project.
- C) Increasing the FV decreases the PV.
- D) Decreasing the PV decreases the FV.
- E) Decreasing the discount rate increases the FV.

Answer: D

Difficulty: 1 Easy

Section: 4.1 Valuation: The One-Period Case

Topic: Net present value

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

3) At a discount rate of 5 percent, which one of the following is the correct formula for computing the PV of $1 to be received one year from today?

- A) $1/1.05
- B) $1
- C) $1 × 1.05
- D) $1 × 1.052
- E) $1/1.052

Answer: A

Difficulty: 1 Easy

Section: 4.1 Valuation: The One-Period Case

Topic: Present value – single cash flow

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

4) What effect will an increase in the discount rate have on the present value of a project that has an initial cash outflow followed by five years of cash inflows?

- A) There will be no effect on the PV.
- B) The PV will change but the direction of the change is unknown.
- C) The PV will remain the same as the timing of the cash flows must change also.
- D) The PV will increase.
- E) The PV will decrease.

Answer: E

Difficulty: 1 Easy

Section: 4.2 The Multiperiod Case

Topic: Present value – multiple cash flows

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

5) You are considering two projects. Project A has projected cash flows of $6,500, $4,500, and $2,500 for the next three years, respectively. Project B has projected cash flows of $2,500, $4,500, and $6,500 for the next three years, respectively. Assuming both projects have the same initial cost, you know that:

- A) there are no conditions under which the projects can have equal values.
- B) Project B has a higher net present value than Project A.
- C) Project A is more valuable than Project B given a positive discount rate.
- D) both projects offer the same rate of return.
- E) both projects have equal net present values at any discount rate.

Answer: C

Difficulty: 1 Easy

Section: 4.2 The Multiperiod Case

Topic: Present value – multiple cash flows

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

6) An interest rate that is compounded monthly, but is expressed as if the rate were compounded annually, is called the ________ rate.

- A) stated interest
- B) compound interest
- C) effective annual
- D) periodic interest
- E) daily interest

Answer: C

Difficulty: 1 Easy

Section: 4.3 Compounding Periods

Topic: Annual, holding period, and effective rates

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

7) The interest rate charged per period multiplied by the number of periods per year is called the ________ rate.

- A) effective annual
- B) annual percentage
- C) periodic interest
- D) compound interest
- E) daily interest

Answer: B

Difficulty: 1 Easy

Section: 4.3 Compounding Periods

Topic: Annual, holding period, and effective rates

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

8) The annual percentage rate:

- A) considers interest on interest.
- B) is the actual cost of a loan with monthly payments.
- C) is higher than the effective annual rate when interest is compounded quarterly.
- D) is the interest rate charged per period divided by (1 +
*n*), when*n*is the number of periods per year. - E) equals the effective annual rate when the interest on an account is designated as simple interest.

Answer: E

Difficulty: 1 Easy

Section: 4.3 Compounding Periods

Topic: Annual, holding period, and effective rates

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

9) You would be making a wise decision if you chose to:

- A) base decisions regarding investments on effective rates and base decisions regarding loans on annual percentage rates.
- B) assume all loans and investments are based on simple interest.
- C) accept the loan with the lower effective annual rate rather than the loan with the lower annual percentage rate.
- D) invest in an account paying 6 percent, compounded quarterly, rather than an account paying 6 percent, compounded monthly.
- E) ignore the effective rates and concentrate on the annual percentage rates for all transactions.

Answer: C

Difficulty: 1 Easy

Section: 4.3 Compounding Periods

Topic: Annual, holding period, and effective rates

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

10) The highest effective annual rate that can be derived from an annual percentage rate of 9 percent is computed as:

- A) (1 + .09/365)(365).
- B)
*e*.09 - C) 1.09
*e*. - D)
*e*.09− 1. - E) (1 + .09/365)365− 1.

Answer: D

Difficulty: 1 Easy

Section: 4.3 Compounding Periods

Topic: Annual, holding period, and effective rates

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

11) Given a stated interest rate, which form of compounding will yield the highest effective rate of interest?

- A) Annual compounding
- B) Monthly compounding
- C) Daily compounding
- D) Continuous compounding
- E) Semiannual compounding

Answer: D

Difficulty: 1 Easy

Section: 4.3 Compounding Periods

Topic: Continuous compounding

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

12) A perpetuity differs from an annuity because:

- A) perpetuity cash flows vary with the rate of inflation.
- B) perpetuity cash flows vary with the market rate of interest.
- C) perpetuity cash flows are variable while annuity payments are constant.
- D) perpetuity cash flows never cease.
- E) annuity cash flows occur at irregular intervals of time.

Answer: D

Difficulty: 1 Easy

Section: 4.4 Simplifications

Topic: Perpetuities

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

13) You are comparing two investment options, each of which will provide $15,000 of total income. Option A pays five annual payments starting with $5,000 the first year followed by four annual payments of $2,500 each. Option B pays five annual payments of $3,000 each. Which one of the following statements is correct given these two investment options?

- A) Both options are of equal value today.
- B) Given a positive rate of return, Option A is worth more today than Option B.
- C) Option B has a higher present value than Option A given a positive rate of return.
- D) Option B has a lower present value than Option A given a zero rate of return.
- E) Option A is preferable because it is an annuity due.

Answer: B

Difficulty: 1 Easy

Section: 4.4 Simplifications

Topic: Annuities

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

14) An annuity stream of cash flow payments is a set of:

- A) equal cash flows occurring at equal periods of time over a fixed length of time.
- B) equal cash flows occurring each time period forever.
- C) either equal or varying cash flows occurring at set intervals of time for a fixed period.
- D) increasing cash flows occurring at set intervals of time that go on forever.
- E) arbitrary cash flows occurring each time period for no more than 10 years.

Answer: A

Difficulty: 1 Easy

Section: 4.4 Simplifications

Topic: Annuities

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

15) Annuities where the payments occur at the end of each time period are called ________, whereas ________ refer to annuity streams with payments occurring at the beginning of each time period.

- A) ordinary annuities; early annuities
- B) late annuities; straight annuities
- C) straight annuities; late annuities
- D) annuities due; ordinary annuities
- E) ordinary annuities; annuities due

Answer: E

Difficulty: 1 Easy

Section: 4.4 Simplifications

Topic: Annuities

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

16) A flow of unending annual payments that increase by a set percentage each year and occur at regular intervals of time is called a(n):

- A) annuity due.
- B) growing annuity.
- C) growing perpetuity.
- D) variable annuity.
- E) variable perpetuity.

Answer: C

Difficulty: 1 Easy

Section: 4.4 Simplifications

Topic: Perpetuities

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

17) Ted purchased an annuity today that will pay $1,000 a month for five years. He received his first monthly payment today. Allison purchased an annuity today that will pay $1,000 a month for five years. She will receive her first payment one month from today. Which one of the following statements is correct concerning these two annuities?

- A) Both annuities are of equal value today.
- B) Allison’s annuity is an annuity due.
- C) Ted’s annuity has a higher present value than Allison’s.
- D) Allison’s annuity has a higher present value than Ted’s.
- E) Ted’s annuity is an ordinary annuity.

Answer: C

Difficulty: 1 Easy

Section: 4.4 Simplifications

Topic: Annuities

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

18) Assume an annuity will pay $1,000 a year for five years with the first payment occurring in Year 4, that is, four years from today. When you compute the present value of that annuity using the PV formula, the PV will be as of which point in time?

- A) Today, Year 0
- B) Year 1
- C) Year 3
- D) Year 4
- E) Year 2

Answer: C

Difficulty: 1 Easy

Section: 4.4 Simplifications

Topic: Annuities

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

19) Martha left an inheritance to her grandson that will pay him $1,500 on the first day of every other year. When computing the PV of this inheritance, the grandson should use:

- A) simple interest.
- B) a semiannually compounded discount rate.
- C) an effective annual rate.
- D) a 2-year discount rate.
- E) a semiannual discount rate.

Answer: D

Difficulty: 1 Easy

Section: 4.4 Simplifications

Topic: Annuities

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

20) Binder and Sons borrowed $138,000 for three years from their local bank and now they are paying monthly payments that include both principal and interest. Paying off debt by making instalment payments, such as this firm is doing, is referred to as:

- A) foreclosing on the debt.
- B) amortizing the debt.
- C) funding the debt.
- D) calling the debt.
- E) refunding the debt.

Answer: B

Difficulty: 1 Easy

Section: 4.5 Loan Amortization

Topic: Amortization

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

21) Assume you borrow $6,600 for three years. How much will you still owe after the three years if you pay all of the payments as set forth in the loan’s amortization schedule?

- A) $6,500
- B) $0
- C) $2,200
- D) $3,150
- E) $2,650

Answer: B

Difficulty: 1 Easy

Section: 4.5 Loan Amortization

Topic: Amortization

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

22) Assume you borrow $12,000 for 5 years with equal annual repayments. If the interest rate on the actual loan turns out to be higher than you anticipated, then the:

- A) total principal repaid will be less than anticipated.
- B) loan will still have a balance due at the end of the 5-year amortization period.
- C) first annual payment will repay more of the principal than anticipated.
- D) anticipated amortization schedule will still apply as the loan is still a 5-year loan.
- E) annual payments will be higher than you anticipated.

Answer: E

Difficulty: 1 Easy

Section: 4.5 Loan Amortization

Topic: Amortization

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

23) What rate of return should be used to compute the NPV of a proposed purchase of Smiley’s, an operating business?

- A) A discount rate equal to Smiley’s current return on equity
- B) The discount rate applicable to other investments with similar risks
- C) A discount rate equal to Smiley’s net profit percentage
- D) The rate of interest charged by a bank for a loan similar in size to the cost of the purchase
- E) A discount rate that makes the NPV of the proposed purchase positive

Answer: B

Difficulty: 1 Easy

Section: 4.6 What Is a Firm Worth?

Topic: Firm valuation

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

24) For a proposed purchase to be acceptable, the PV of the future cash flows must:

- A) be positive at the relevant discount rate.
- B) be less than the cost of the purchase.
- C) equal or exceed the cost of the purchase.
- D) equal the purchase price.
- E) be positive at all discount rates.

Answer: C

Difficulty: 1 Easy

Section: 4.6 What Is a Firm Worth?

Topic: Firm valuation

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

25) What is the present value of $6,811 to be received in one year if the discount rate is 6.5 percent?

- A) $6,395.31
- B) $6,023.58
- C) $6,643.29
- D) $6,671.13
- E) $7,253.72

Answer: A

Explanation: PV = $6,811/1.065

PV = $6,395.31

Difficulty: 2 Medium

Section: 4.1 Valuation: The One-Period Case

Topic: Present value – single cash flow

Bloom’s: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

26) Stu can purchase a house today for $110,000, including the cost of some minor repairs. He expects to be able to resell it in one year for $129,000 after cleaning up the property. At a discount rate of 5.5 percent, what is the expected net present value of this purchase opportunity?

- A) $13,001.61
- B) $12,487.43
- C) $12,274.88
- D) $9,208.18
- E) $11,311.02

Answer: C

Explanation: NPV = −$110,000 + $129,000/1.055

NPV = $12,274.88

Difficulty: 2 Medium

Section: 4.1 Valuation: The One-Period Case

Topic: Net present value

Bloom’s: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

27) You have been awarded an insurance settlement of $250,000 that is payable one year from today. What is the minimum amount you should accept today in exchange for this settlement if you can earn 6.7 percent on your investments?

- A) $232,866.67
- B) $234,301.78
- C) $242,408.19
- D) $250,000.00
- E) $238,079.19

Answer: B

Explanation: PV = $250,000/1.067

PV = $234,301.78

Difficulty: 2 Medium

Section: 4.1 Valuation: The One-Period Case

Topic: Net present value

Bloom’s: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

28) You plan to invest $6,500 for three years at 4 percent simple interest. What will your investment be worth at the end of the three years?

- A) $7,280.00
- B) $7,311.62
- C) $7,250.00
- D) $6,924.32
- E) $6,760.00

Answer: A

Explanation: ValueYear 3 = $6,500 + $6,500(.04)(3)

ValueYear 3 = $7,280.00

Difficulty: 2 Medium

Section: 4.2 The Multiperiod Case

Topic: Simple and compound interest

Bloom’s: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

29) Shawn has $2,500 invested at a guaranteed rate of 4.35 percent, compounded annually. What will his investment be worth after five years?

- A) $2,997.04
- B) $3,288.00
- C) $3,321.32
- D) $3,093.16
- E) $2,857.59

Answer: D

Explanation: FV5 = $2,500(1.04355)

FV5 = $3,093.16

Difficulty: 2 Medium

Section: 4.2 The Multiperiod Case

Topic: Future value – single cash flow

Bloom’s: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

30) Beatrice invests $1,000 in an account that pays 5 percent simple interest. How much more could she have earned over a period of 10 years if the interest had compounded annually?

- A) $132.45
- B) $135.97
- C) $128.89
- D) $117.09
- E) $121.67

Answer: C

Explanation: FVSimple = $1,000 + $1,000(.05)(10)

FVSimple = $1,500

FV = $1,000(1.0510)

FV = $1,628.89

Difference = $1,628.89 − 1,500

Difference = $128.89

Difficulty: 2 Medium

Section: 4.2 The Multiperiod Case

Topic: Simple and compound interest

Bloom’s: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

31) A project is expected to produce cash flows of $48,000, $39,000, and $15,000 over the next three years, respectively. After three years, the project will be worthless. What is the net present value of this project if the applicable discount rate is 15.25 percent and the initial cost is $78,500?

- A) −$1,201.76
- B) $2,309.09
- C) −$3,457.96
- D) $1,808.17
- E) $3,132.48

Answer: B

Explanation: NPV = −$78,500 + $48,000/1.1525 + $39,000/1.15252 + $15,000/1.15253

NPV = $2,309.09

Difficulty: 2 Medium

Section: 4.2 The Multiperiod Case

Topic: Present value – multiple cash flows

Bloom’s: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

32) Over the next three years, Marti plans to save $2,000, $2,500, and $3,000, respectively, starting one year from today. You want to have as much money as Marti does three years from now but you plan to make one lump sum investment today. What amount must you save today if you both earn 4.65 annually?

- A) $6,811.50
- B) $6,791.42
- C) $7,128.23
- D) $6,607.23
- E) $7,500.00

Answer: A

Explanation: PV = $2,000/1.0465 + $2,500/1.04652 + $3,000/1.04653

PV = $6,811.50

Difficulty: 2 Medium

Section: 4.2 The Multiperiod Case

Topic: Present value – multiple cash flows

Bloom’s: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

33) An insurance settlement offer includes annual payments of $36,000, $42,000, and $50,000 over the next three years, respectively, with the first payment being made one year from today. What is the minimum amount you should accept today as a lump sum settlement if your discount rate is 7 percent?

- A) $119,877.67
- B) $111,144.18
- C) $105,000.10
- D) $118,924.27
- E) $114,556.88

Answer: B

Explanation: PV = $36,000/1.07 + $42,000/1.072 + $50,000/1.073

PV = $111,144.18

Difficulty: 2 Medium

Section: 4.2 The Multiperiod Case

Topic: Present value – multiple cash flows

Bloom’s: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

34) You have been offered a job that pays an annual salary of $48,000, $51,000, and $55,000 over the next three years, respectively. The offer also includes a starting bonus of $2,500 payable immediately. What is this offer worth to you today at a discount rate of 6.5 percent?

- A) $129,640.14
- B) $134,383.56
- C) $132,283.56
- D) $138,066.75
- E) $130,983.56

Answer: D

Explanation: PV = $2,500 + $48,000/1.065 + $51,000/1.0652 + $55,000/1.0653

PV = $138,066.75

Difficulty: 2 Medium

Section: 4.2 The Multiperiod Case

Topic: Present value – multiple cash flows

Bloom’s: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

35) You are considering a project with projected annual cash flows of $32,200, $41,800, and $22,900 for the next three years, respectively. What is the present value of these cash flows at a discount rate of 14 percent?

- A) $86,487.47
- B) $75,866.20
- C) $77,103.18
- D) $81,292.25
- E) $66,549.30

Answer: B

Explanation: PV = $32,200/1.14 + $41,800/1.142 + $22,900/1.143

PV = $75,866.20

Difficulty: 2 Medium

Section: 4.2 The Multiperiod Case

Topic: Present value – multiple cash flows

Bloom’s: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

36) You expect an investment to return $11,300, $14,600, $21,900, and $38,400 annually over the next four years, respectively. What is this investment worth to you today if you desire a rate of return of 16.5 percent?

- A) $64,253.91
- B) $58,700.89
- C) $63,732.41
- D) $55,153.57
- E) $59,928.16

Answer: D

Explanation: PV = $11,300/1.165 + $14,600/1.1652 + $21,900/1.1653 + $38,400/1.1654

PV = $55,153.57

Difficulty: 2 Medium

Section: 4.2 The Multiperiod Case

Topic: Present value – multiple cash flows

Bloom’s: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

37) Assume a cash flow of $82,400 in the first year and $148,600 in the second year. Also assume a present value of $303,764.34 at a discount rate of 12.75 percent. What is the cash flow in the third year if that is the only other cash flow?

- A) $163,100
- B) $163,800
- C) $164,900
- D) $164,400
- E) $163,700

Answer: A

Explanation: $303,764.34 = $82,400/1.1275 + $148,600/1.12752 + *C*3/1.12753

*C3* = $163,100

Difficulty: 2 Medium

Section: 4.2 The Multiperiod Case

Topic: Present value – multiple cash flows

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

38) U Do It Centers deposited $3,200 in an account two years ago and is depositing another $5,000 today. A final deposit of $3,500 will be made one year from now. What will the account balance be three years from now if the account pays 4.85 percent interest, compounded annually?

- A) $13,033.95
- B) $13,430.84
- C) $12,431.05
- D) $14,328.90
- E) $13,666.10

Answer: E

Explanation: FV3 = $3,200(1.04855) + $5,000(1.04853) + $3,500(1.04852)

FV3 = $13,666.10

Difficulty: 2 Medium

Section: 4.2 The Multiperiod Case

Topic: Future value – multiple cash flows

Bloom’s: Apply

AACSB: Knowledge Application

Accessibility: Keyboard Navigation

39) Anna has $38,654 in a savings account that pays 2.3 percent interest. Assume she withdraws $10,000 today and another $10,000 one year from today. If she waits and withdraws the remaining entire balance four years from today, what will be the amount of that withdrawal?

- A) $20,916.78
- B) $20,109.08
- C) $20,676.53
- D) $19,341.02
- E) $19,608.07

Answer: C

Explanation: $38,654 = $10,000 + $10,000/1.023 + *C*4/1.0234

*C4* = $20,676.53

Difficulty: 2 Medium

Section: 4.2 The Multiperiod Case

Topic: Present value – multiple cash flows

Bloom’s: Analyze

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

## Reviews

There are no reviews yet.