Answer:
Options for Question 83:
Question: A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: The Nantell Corporation just purchased an expensive piece of equipment. Assume that the firm planned to depreciate the equipment over 5 years on a straight-line basis, but Congress then passed a provision that requires the company to depreciate the equipment on a straight-line basis over 7 years. Other things held constant, which of the following will occur as a result of this Congressional action? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.
Answer:
Options:
Question: On its 12/31/14 balance sheet, Barnes Inc showed $150 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT?
Answer:
Options:
Question: As a result of compounding, the effective annual rate on a bank deposit (or a loan) is always equal to or greater than the nominal rate on the deposit (or loan).
Answer Choices:
a. True
b. False
Answer:
a. True
Question: In a “Dutch auction” for new stock, individual investors place bids for shares directly. Each potential bidder indicates the price he or she is willing to pay and how many shares he or she will purchase at that price. The highest price that permits the company to sell all the shares it wants to sell is determined, and this is the “market clearing price.” All bidders who specified this price or higher are allowed to purchase their shares at the market clearing price.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by multiplying the periodic rate by the number of periods per year.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: If we are given a periodic interest rate, say a monthly rate, we can find the nominal annual rate by dividing the periodic rate by the number of periods per year.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: If a bank compounds savings accounts quarterly, the nominal rate will exceed the effective annual rate.
Answer Choices:
a. True
b. False
Answer:
b. False
Question: Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales, other operating costs, and tax rates are not affected, and assume that the same depreciation method is used for tax and stockholder reporting purposes.
Answer Choices:
a. Companies’ after-tax operating profits would decline.
b. Companies’ physical stocks of fixed assets would increase.
c. Companies’ cash flows would increase.
d. Companies’ cash positions would decline.
e. Companies’ reported net incomes would decline.
Answer:
c. Companies’ cash flows would increase.
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Assets other than cash are expected to produce cash over time, and the amounts of cash they eventually produce should be exactly the same as the amounts at which the assets are carried on the books.
b. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm’s future earnings and dividends, and the riskiness of those cash flows.
c. The annual report is an internal document prepared by a firm’s managers solely for the use of its creditors/lenders.
d. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and statement of stockholders’ equity.
e. Prior to the Enron scandal in the early 2000s, companies would put verbal information in their annual reports, along with the financial statements. That verbal information was often misleading, so today annual reports can contain only quantitative information: audited financial statements.
Answer:
b. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm’s future earnings and dividends, and the riskiness of those cash flows.
Question: Taggart Technologies is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Taggart pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?
Answer Choices:
a. The ROA will decline.
b. Taxable income will decline.
c. The tax bill will increase.
d. Net income will decrease.
e. The times-interest-earned ratio will decrease.
Answer:
c
Question: The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company’s operating efficiency is that the BEP does not reflect the effects of debt and taxes.
Answer:
Options
Question: Funds acquired by the firm through retaining earnings have no cost because there are no dividend or interest payments associated with them, and no flotation costs are required to raise them, but capital raised by selling new stock or bonds does have a cost.
Answer Choices:
a. True
b. False
Answer:
b. False