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Classified Balance Sheet And Multistep Income Statement Using The Adjusted Trial Balance For ABC Corporation As Of And For The Year Ended December 31, 2010

Using Excel, prepare a classified balance sheet and multistep income statement using the Adjusted Trial Balance for ABC Corporation as of and for the year ended December 31, 2010

Self-Test Multiple Choice, Finance

  1. Prices of securities that are traded on the organized exchanges are determined by

Which of the following refers to all institutions and procedures that provide for transactions in

  1. short-term debt instruments generally issued by borrowers with very high credit ratings?

Which of the following represents the correct ordering of returns over the period 1926 to 2008

  1. (from lowest to highest return)?
  2. Private placements are
  3. Insurance companies invest in the “long-end” of the securities market by purchasing securities with longer maturities. In which of the following instruments would an insurance company be least likely to invest most of its assets?
  4. Three ways that savings can be transferred through the financial markets include all of the following except
  5. The investment banker does not underwrite the securities to be issued in which of the following?
  6. What is the term for a graphical representation of the relationship between interest rates and the maturities of debt securities?
  7. Which of the following statements is most correct concerning flotation costs?
  8. The Sarbanes-Oxley Act of 2002, in order to protect investors, requires a higher level of accountability for which of the following groups?
  9. During the period 1984 to 2008, the average yield on 3-Month U.S. Treasury bills was 4.76%, the average inflation rate was 2.97%, the average yield on 30-year Treasury bonds was 6.89%, and the average return on 30-year Aaa-Rated Corporate Bonds was 7.73%. The real risk-free short-term interest rate is
  10. You are considering an investment in a U.S. Treasury bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the default risk premium for AAA rated corporate bonds is 3.5%. What rate of interest should the U.S. Treasury bond pay?
  11. You are considering an investment in a AAA-rated U.S. corporate bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the default risk premium for AAA rated corporate bonds is 3.5%. What rate of interest should the U.S. corporate bond pay?
  12. An actively traded, AAA-rated, Intel Corporation bond, maturing in 2015, provides an expected yield of 8%. The AAA-rated bond of a local Chicago-based company, not actively traded on any exchange, maturing in 2015, provides an expected yield to investors of 10%. The difference in expected yields is primarily due to
  13. Suppose the following rates are averages for banks in your area: interest checking accounts pay 1%, savings accounts pay 2%, and one-year certificates of deposit pay 3%. All accounts are federally insured by the FDIC. The difference in rates can be explained mainly by
  14. General Electric (GE) has been a public company for many years with its common stock traded on the New York Stock Exchange. If GE decides to sell 500,000 shares of new common stock, the transaction will be describe as
  15. When a company repurchases its own common stock, it is likely that
  16. The investment banker performs what three basic functions?
  17. The one-year interest rate is 4%. The interest rate for a two-year security is 6%. According to the unbiased expectations theory, the one-year interest rate one year from now must be equal to
  18. The Securities and Exchange Commission (SEC)
  19. Activities of the investment banker include
  20. A basis point is equal to
  21. Which of the following represents the correct ordering of standard deviation of returns over the period 1926 to 2008 (from highest to lowest standard deviation of returns)?
  22. The costs associated with issuing securities to the public can be high. Some types of securities have greater expenses associated with them than others. Which of the following is the most costly security to issue?
  23. Investment banking firms offer to facilitate the sale of securities to the public in a variety of ways. Which of the following methods guarantees the corporation with a pre-determined price for the securities?
  24. During the period 1984 to 2008, the average yield on 3-Month U.S. Treasury bills was 4.76%, the average inflation rate was 2.97%, the average yield on 30-year Treasury bonds was 6.89%, and the average return on 30-year Aaa-Rated Corporate Bonds was 7.73%. The real risk-free short-term interest rate is
  25. The nominal interest rate is 7% and the expected inflation rate is 2%. Based on the Fisher effect, the real rate of interest is
  26. You are considering an investment in a U.S. Treasury bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 1.5%; the maturity risk premium is 2.5%; and, the default risk premium for AAA rated corporate bonds is 3.5%. What rate of interest should the U.S. Treasury bond pay?
  27. An actively traded, AAA-rated, Intel Corporation bond, maturing in 2015, provides an expected yield of 8%. The AAA-rated bond of a local Chicago-based company, not actively traded on any exchange, maturing in 2015, provides an expected yield to investors of 10%. The difference in expected yields is primarily due to
  28. Suppose the following rates are averages for banks in your area: interest checking accounts pay 1%, savings accounts pay 2%, and one-year certificates of deposit pay 3%. All accounts are federally insured by the FDIC. The difference in rates can be explained mainly by
  29. A life insurance company purchases $1 billion of corporate bonds from premiums collected on its life insurance policies. Therefore,
  30. The risk premium would be greater for an investment in an oil and gas exploration in unproven fields than an investment in preferred stock because
  31. Advantages of private placements do not include which of the following?
  32. A “normal” yield curve is
  33. A commitment fee is
  34. Which of the following is not a benefit provided by the existence of organized security exchanges?
  35. The prime lending rate is the base rate on
  36. Money market transactions include which of the following?
  37. Capital market transactions include which of the following?
  38. A “Dutch auction” was used by Google to raise money in 2004. A Dutch auction involves
  39. Commercial banks that also provide investment banking services are called
  40. Which of the following is an example of both a capital market and a primary market transaction?
  41. The Sarbanes-Oxley Act of 2002 holds all of the following groups strictly accountable in a legal sense for any instances of misconduct except:
  42. All of the following are benefits of organized stock exchanges except:
  43. Which of the following is not a valid theory that attempts to explain the shape of the term structure of interest rates?
  44. Reynolds, Inc. needs to raise $5 million by selling common stock. Reynolds sells 1 million shares of stock at $5 each to Goldman Sachs, who then is responsible for selling the shares to investors. This is an example of a
  45. A wealthy private investor providing a direct transfer of funds is called
  46. Private placements usually have several advantages associated with them, but also tend to suffer from specific disadvantages. Which of the following is a disadvantage of a private placement when compared to other methods of selling new securities?
  47. Capital market instruments include
  48. Money market instruments include:
  49. When an investment banking firm “underwrites” an issue of securities, the firm is performing which of the following?
  50. Which of the following securities will likely have the highest maturity risk premium?
  51. General Motors raises money by selling a new issue of common stock. This transaction occurs in
  52. Which of the following statements is false?
  53. An example of a primary market transaction is
  54. Common examples of financial intermediaries include all of the following except
  55. Which of the following would not normally be considered a “flotation cost”?
  56. An example of a secondary market transaction involving a capital market security is
  57. Which of the following statements is an example of a futures market transaction?
  58. The New York Stock Exchange (NYSE) is
  59. Financial intermediaries
  60. Spandra Electronics wants to raise money by selling stock. After talking to several investment banking firms, Spandra decides to hire Goldman Sachs to sell 5 million shares of its common stock. Goldman sells 4.5 million shares and returns the rest to Spandra. This is an example of
  61. The Sarbanes-Oxley Act, or SOX,
  62. All of the following securities are sold in money markets except:
  63. ExxonMobil generates about $50 billion in cash annually from its operations and invests about half of that on new exploration. Therefore, ExxonMobil is an example of a(n)
  64. The one-year interest rate is 4%. The interest rate for a two-year security is 6%. The one-year interest rate one year from now is 8.34%. According to the liquidity preference theory, the risk premium for the second one-year investment is
  65. Which of the following statements concerning private placements is most correct?
  66. A corporation sells securities to an investment banking firm on January 1st. The next day an international oil crisis causes stock prices to drop dramatically. The corporation is immune from the drop in price of its stock due to which function of the investment banking firm?
  67. The real rate of return is the return earned above the
  68. The stock market with the most stringent listing requirements is the
  69. In August 2004, Google first sold its common stock to the public at $85 per share and raised $1.76 billion. This is an examples of
  70. All of the following are typically advantages of private placements except:
  71. The nominal interest rate is 7% and the expected inflation rate is 2%. Based on the Fisher effect, the real rate of interest is
  72. Which of the following securities will likely have the highest liquidity premium?
  73. Prices of securities that are traded in the Over-the-Counter Markets are determined by

Finance Timed Exam Quiz

Question 1
1. Multinational financial management requires that
 
 the effects of changing currency values be included in financial analyses.
 
 legal and economic differences need not be considered in financial decisions because these differences are insignificant.
 
 political risk should be excluded from multinational corporate financial analyses.
 
 traditional U.S. and European financial models incorporating the existence of a competitive marketplace not be recast when analyzing projects in other parts of the world.
 
 cultural differences need not be accounted for when considering firm goals and employee management.


Question 2
1. Fool Proof Software is considering a new project whose data are shown below.  The equipment that would be used has a 3-year tax life, and the allowed depreciation rates for such property are 33%, 45%, 15%, and 7% for Years 1 through 4.  Revenues and other operating costs are expected to be constant over the project’s 10-year expected life.  What is the Year 1 cash flow?
Equipment cost (depreciable basis) $59,000
Sales revenues, each year $60,000
Operating costs (excl. depr.) $25,000
Tax rate 35.0%
 
   $26,312
   $34,590
   $29,565
   $28,973
   $33,112


 
Question 3
1. If one U.S. dollar buys 0.9875 Canadian dollars, how many U.S. dollars can you purchase for one Canadian dollar?


 
 0.8203
 
 1.0532
 
 1.0937
 
 0.9418
 
 1.0127

 
Question 4
1. Suppose the exchange rate between U.S. dollars and Swiss francs is SF 1.41 = $1.00, and the exchange rate between the U.S. dollar and the euro is $1.00 = 0.50 euro.  What is the cross rate of Swiss francs to euros?
 
 0.3688
 
 0.4113
 
 0.3546
 
 0.3830
 
 0.4433

 
Question 5
1. As assistant to the CFO of Boulder Inc., you must estimate the Year 1 cash flow for a project with the following data.  What is the Year 1 cash flow?
Sales revenues $13,600
Depreciation $4,000
Other operating costs $6,000
Tax rate 35.0%
 
   $6,340
   $5,896
   $7,671
   $5,579
   $7,481

Question 6
1. Which of the following statements is CORRECT?
 
 An example of a sunk cost is the cost associated with restoring the site of a strip mine once the ore has been depleted.
 
 Sunk costs must be considered if the IRR method is used but not if the firm relies on the NPV method.
 
 A good example of a sunk cost is a situation where a bank opens a new office, and that new office leads to a decline in deposits of the bank’s other offices.
 
 A good example of a sunk cost is money that a banking corporation spent last year to investigate the site for a new office, then expensed that cost for tax purposes, and now is deciding whether to go forward with the project.
 
 If sunk costs are considered and reflected in a project’s cash flows, then the project’s calculated NPV will be higher than it otherwise would have been had the sunk costs been ignored.

 
Question 7
1. One year ago, a U.S. investor converted dollars to yen and purchased 100 shares of stock in a Japanese company at a price of 3,150 yen per share. The stock’s total purchase cost was 315,000 yen.  At the time of purchase, in the currency market 1 yen equaled $0.00952.  Today, the stock is selling at a price of 3,465 yen per share, and in the currency market $1 equals 130 yen.  The stock does not pay a dividend.  If the investor were to sell the stock today and convert the proceeds back to dollars, what would be his realized return on his initial dollar investment from holding the stock?

 
 a.   2.97%


 
 b.   1.15%


 
 c. – 3.71%


 
 d. – 9.19%


 
 e. -11.12%

Question 8
1. A company is considering a new project.  The CFO plans to calculate the project’s NPV by estimating the relevant cash flows for each year of the project’s life (i.e., the initial investment cost, the annual operating cash flows, and the terminal cash flows), then discounting those cash flows at the company’s overall WACC.  Which one of the following factors should the CFO be sure to INCLUDE in the cash flows when estimating the relevant cash flows?
 
 All sunk costs that have been incurred relating to the project.
 
 All interest expenses on debt used to help finance the project.
 
 The additional investment in net operating working capital required to operate the project, even if that investment will be recovered at the end of the project’s life.
 
 Sunk costs that have been incurred relating to the project, but only if those costs were incurred prior to the current year.
 
 Effects of the project on other divisions of the firm, but only if those effects lower the project’s own direct cash flows.

  
Question 9
1. If one British pound can purchase $1.90 U.S. dollars, how many British pounds can one U.S. dollar buy?
 
 0.4947
 
 0.6105
 
 0.4053
 
 0.5263
 
 0.4579


Question 10
1. Your company, RMU Inc., is considering a new project whose data are shown below.  What is the project’s Year 1 cash flow?
Sales revenues $25,500
Depreciation $8,000
Other operating costs $12,000
Tax rate 35.0%
 
   $13,196
   $11,691
   $9,955
   $11,575
   $10,186

  
Question 11
1. A currency trader observes the following quotes in the spot market:
1 U.S. dollar     =  83.0000 Japanese yen
1 British pound  = 2.2500 Swiss francs
1 British pound  = 1.6500 U.S. dollars
  

Given this information, how many yen can be purchased for 1 Swiss franc?
 
 61.4753
 
 51.1280
 
 57.8233
 
 49.3020
 
 60.8667


Question 12
1. Temple Corp. is considering a new project whose data are shown below.  The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value.  No change in net operating working capital would be required.  Revenues and other operating costs are expected to be constant over the project’s 3-year life.  What is the project’s NPV?
Risk-adjusted WACC 10.0%
Net investment cost (depreciable basis) $65,000
Straight-line depr. rate 33.3333%
Sales revenues, each year $63,500
Annual operating costs (excl. depr.) $25,000
Tax rate 35.0%
 
   $12,551
   $12,712
   $12,069
   $16,092
   $14,000

 
Question 13
1. Suppose one British pound can purchase 1.82 U.S. dollars today in the foreign exchange market, and currency forecasters predict that the U.S. dollar will depreciate by 12.0% against the pound over the next 30 days.  How many dollars will a pound buy in 30 days?
 
 $1.4860
 
 $1.6511
 
 $1.8346
 
 $2.0384
 
 $2.2422


Question 14
1. Which of the following statements is CORRECT?
 
 Since depreciation is a cash expense, the faster an asset is depreciated, the lower the projected NPV from investing in the asset.
 
 Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 5 years or longer.
 
 Corporations must use the same depreciation method for both stockholder reporting and tax purposes.
 
 Using accelerated depreciation rather than straight line normally has the effect of speeding up cash flows and thus increasing a project’s forecasted NPV.
 
 Using accelerated depreciation rather than straight line normally has the effect of slowing down cash flows and thus reducing a project’s forecasted NPV.

 
Question 15
1. Which of the following are reasons why companies move into international operations?

 
 a.     To take advantage of lower production costs in regions of inexpensive labor.


 
 b.     To develop new markets for their finished products.


 
 c.     To better serve their primary customers.


 
 d.     Because important raw materials are located abroad.


 
 e.     All of the statements above are correct.


Question 16
1. A company is considering a proposed new plant that would increase productive capacity.  Which of the following statements is CORRECT?
 
 In calculating the project’s operating cash flows, the firm should not deduct financing costs such as interest expense, because financing costs are accounted for by discounting at the WACC.  If interest were deducted when estimating cash flows, this would, in effect,  “double count” it.
 
 Since depreciation is a non-cash expense, the firm does not need to deal with depreciation when calculating the operating cash flows.
 
 When estimating the project’s operating cash flows, it is important to include both opportunity costs and sunk costs, but the firm should ignore the cash flow effects of externalities since they are accounted for in the discounting process.
 
 Capital budgeting decisions should be based on before-tax cash flows because WACC is calculated on a before-tax basis.
 
 The WACC used to discount cash flows in a capital budgeting analysis should be calculated on a before-tax basis. To do otherwise would bias the NPV upward.


Question 17
1. If one Swiss franc can purchase $0.85 U.S. dollars, how many Swiss francs can one U.S. dollar buy?
 
 1.2588
 
 1.1765
 
 1.3647
 
 1.2471
 
 1.0824


Question 18
1. Rowell Company spent $3 million two years ago to build a plant for a new product.  It then decided not to go forward with the project, so the building is available for sale or for a new product.  Rowell owns the building free and clear–there is no mortgage on it.  Which of the following statements is CORRECT?
 
 Since the building has been paid for, it can be used by another project with no additional cost.  Therefore, it should not be reflected in the cash flows of the capital budgeting analysis for any new project.
 
 If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as a cost to any new project that would use it.
 
 This is an example of an externality, because the very existence of the building affects the cash flows for any new project that Rowell might consider.
 
 Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects.
 
 If there is a mortgage loan on the building, then the interest on that loan would have to be charged to any new project that used the building.

Question 19
1. Which of the following statements is CORRECT?
 
 A sunk cost is any cost that must be expended in order to complete a project and bring it into operation.
 
 A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project.
 
 A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project.
 
 Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it became possible to simply include sunk costs in the cash flows and then calculate the project’s NPV.
 
 A good example of a sunk cost is a situation where Home Depot opens a new store, and that leads to a decline in sales of one of the firm’s existing stores.


Question 20
1. If the peso is worth $.07, and the Canadian dollar(C$) is worth $.70, what is the value of the peso in Canadian dollars(C$)?

 
 a.C$ 70
 
 b.C$.10
 
 C$10
 
 C$7
 
 C$1.0