Q: Which formula correctly represents the relationship among assets, liabilities, and shareholders’ equity on the balance sheet?

$$ \text{Assets} = \text{Liabilities} + \text{Shareholders' Equity} $$

Question 1

Which of the following best describes the primary objective of a financial manager in a corporation?

Accepted Answer

To maximize the current value of the share price

Question 2

A company has current assets of $$50,000 and current liabilities of 30$$,000. What is its net working capital?

Accepted Answer

$20,000

Question 3

Which formula correctly represents the relationship among assets, liabilities, and shareholders’ equity on the balance sheet?

Accepted Answer

$$ 	ext{Assets} = 	ext{Liabilities} + 	ext{Shareholders' Equity} $$

Question 4

A firm has a net income of $10,000 and pays out 40% of its earnings as dividends. What is its plowback (retention) ratio?

Accepted Answer

0.60

Question 5

If a company’s market value of equity is $$500,000 and its book value of equity is 250$$,000, what is its market-to-book ratio?

Accepted Answer

$$ 2.0 $$

Question 6

Which of the following is an example of an agency problem in corporate finance?

Accepted Answer

Managers pursuing personal perks at the expense of shareholders

Question 7

A company forecasts sales to increase by 15% next year. If accounts receivable are currently $20,000 and are expected to grow proportionally with sales, what will be the forecasted accounts receivable?

Accepted Answer

$$ 23,000 $$

Question 8

Which formula is used to calculate the present value of a single future cash flow?

Accepted Answer

$$ PV = \dfrac{FV}{(1 + r)^n} $$

Question 9

A bond with a face value of $1,000 pays annual coupons at a rate of 5% and has 10 years to maturity. If the yield to maturity is 7%, is the bond trading at a premium, at par, or at a discount?

Accepted Answer

At a discount

Question 10

Which of the following best describes the Law of One Price?

Accepted Answer

Identical goods must sell for the same price in different competitive markets, ignoring transaction costs and barriers

Question 11

If a company’s return on equity (ROE) is 12% and its plowback ratio is 0.5, what is its sustainable growth rate?

Accepted Answer

$$ 6\% $$

Question 12

A $10,000 investment earns a 6% APR compounded monthly. What is the effective annual rate (EAR)?

Accepted Answer

$$ EAR = (1 + \frac{0.06}{12}$$)^{12}$$ - 1 $$

Question 13

Which of the following is NOT a characteristic of preferred stock?

Accepted Answer

Voting rights in the annual general meeting

Question 14

A company issues a bond with a face value of $1,000, a coupon rate of 8% (annual), and 5 years to maturity. If the market yield is 6%, what can you say about the bond price?

Accepted Answer

The bond will trade at a premium

Question 15

Which formula is used to value a stock using the constant growth Dividend Discount Model (Gordon Growth Model)?

Accepted Answer

$$ P_0$ = \dfrac{$$Div_1$$}{r - g} $$

Question 16

A $$1,000 face value bond pays 40 in $$coupons every 6 months and has 8 years to maturity. What is the annual coupon rate?

Accepted Answer

8%

Question 17

If the nominal interest rate is 7% and the inflation rate is 2%, what is the approximate real interest rate?

Accepted Answer

5%

Question 18

A company’s stock is trading at $$50 per share. Its earnings per share (EPS) are 2. $$What is its price-to-earnings (P/E) ratio?

Accepted Answer

25

Question 19

Which of the following best describes the difference between an ordinary annuity and an annuity due?

Accepted Answer

An ordinary annuity pays at the end of each period, while an annuity due pays at the beginning

Question 20

A company’s free cash flow is forecasted to grow at a constant rate of 4% per year. If next year’s free cash flow is $1,000, the weighted average cost of capital (WACC) is 8%, what is the enterprise value using the constant growth model?

Accepted Answer

$$ 1,000 / (0.08 - 0.04) = 25,000 $$

Lecture 1: Corporate Finance and the Financial Manager; Introduction to Financial Statements Analysis

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