What is the primary purpose of depreciation in accounting? To allocate cost systematically To increase asset value To reduce tax liability To estimate fair market value

To allocate cost systematically

Which of the following are considered types of intangible assets? Vehicles, machinery, tools Cash, receivables, inventory Patents, copyrights, trademarks, franchises, goodwill Equipment, buildings, land

Patents, copyrights, trademarks, franchises, goodwill

What is goodwill considered when included in financial statements? A liability A tangible asset The excess of cost over the fair value of net assets An expense

The excess of cost over the fair value of net assets

In a repurchase agreement where Mendota Corporation sells $9,987,950 worth of Treasury securities to the National Bank of Nebraska and agrees to repurchase them in 30 days for $10,000,000, who is the borrower and who is the lender? Mendota Corporation is the borrower, National Bank of Nebraska is the lender Both are lenders Both are borrowers National Bank of Nebraska is the borrower, Mendota Corporation is the lender

Mendota Corporation is the borrower, National Bank of Nebraska is the lender

What is a TIPS security and what risk does it help investors hedge against? A corporate bond with fixed interest, hedging against interest rate risk A municipal bond with tax benefits, hedging against tax risk A special type of Treasury bond adjusted for inflation, hedging against inflation risk A zero-coupon bond, hedging against reinvestment risk

A special type of Treasury bond adjusted for inflation, hedging against inflation risk

What is a credit spread and what does a 'Flight to Safety' mean in the long-term bonds market? The difference between yields of riskier and safer bonds; investors move to safer bonds The difference between domestic and foreign bond yields; investors move to foreign bonds The difference between short-term and long-term bond yields; investors move to short-term bonds The difference between stock and bond yields; investors move to stocks

The difference between yields of riskier and safer bonds; investors move to safer bonds

What is a STRIPS security and what risk does it help investors manage? A zero-coupon bond, managing reinvestment risk A group of zero-coupon bonds from a Treasury bond's cash flows, managing interest rate risk A municipal bond with tax benefits, managing tax risk A corporate bond with fixed interest, managing credit risk

A group of zero-coupon bonds from a Treasury bond's cash flows, managing interest rate risk

Consider a 3-year TIPS of face value $1,000. The annual coupon rate is 5% with annual payment. It is expected that inflation rate during the first year is 2%; however, there will be a 1% deflation annually during the second and third years. Calculate face values and coupon payments for all three years, respectively. Year 1: $53, Year 2: $52.5, Year 3: $52 Year 1: $52, Year 2: $51.5, Year 3: $51 Year 1: $50, Year 2: $49.5, Year 3: $49 Year 1: $51, Year 2: $50.49, Year 3: $49.99

Year 1: $51, Year 2: $50.49, Year 3: $49.99

What is the prepayment risk of a mortgage and what do pre-payments do to mortgage lenders' profits? Prepayment risk is the risk of late payments, increasing lenders' interest income Prepayment risk is the risk of refinancing, increasing lenders' interest income Prepayment risk is the risk of early loan payoff, reducing lenders' interest income Prepayment risk is the risk of default, reducing lenders' principal income

Prepayment risk is the risk of early loan payoff, reducing lenders' interest income

What is the importance of knowing the cost of capital for a project? It is necessary for determining employee salaries. It helps in setting the selling price of products. It determines the required return for capital budgeting projects. It is used to calculate the company's tax obligations.

It determines the required return for capital budgeting projects.

Which methods can be used to determine the cost of equity? Net Present Value (NPV) or Internal Rate of Return (IRR) Profitability Index or Accounting Rate of Return Dividend Growth Model (DGM) or Security Market Line (SML)/CAPM Payback Period or Discounted Payback Period

Dividend Growth Model (DGM) or Security Market Line (SML)/CAPM

What are the disadvantages of using the Dividend Growth Model (DGM)? It is not sensitive to the estimated growth rate. It is highly accurate and reliable. It is only applicable to companies currently paying dividends. It adjusts for risk explicitly.

It is only applicable to companies currently paying dividends.

What are the advantages and disadvantages of using the CAPM? It is simple to use and does not require any estimates. It does not consider past data for predictions. It is applicable only to large companies. It adjusts for systematic risk but requires estimating market risk premium and beta.

It adjusts for systematic risk but requires estimating market risk premium and beta.

What is the cost of debt and how is it determined? It is the coupon rate of the firm's outstanding debt. It is the interest rate the firm must pay on new borrowing, determined by the YTM on existing debt. It is the average interest rate of all loans taken by the firm. It is the interest rate set by the central bank.

It is the interest rate the firm must pay on new borrowing, determined by the YTM on existing debt.

Why is the coupon rate for the firm's outstanding debt considered irrelevant? It is used to calculate the firm's tax obligations. It only tells us the cost of debt at the time of issuance. It is used to set employee salaries. It determines the firm's current market value.

It only tells us the cost of debt at the time of issuance.

How is the cost of preferred stock determined? By estimating the growth rate of dividends. By using the perpetuity formula, as preferred stock pays a constant dividend. By using the CAPM model. By calculating the average dividend yield over the past five years.

By using the perpetuity formula, as preferred stock pays a constant dividend.

What does the Weighted Average Cost of Capital (WACC) represent? The cost of equity for the firm. The firm's tax rate. The required return on the firm's assets based on market risk perception. The average interest rate on the firm's debt.

The required return on the firm's assets based on market risk perception.

What are the issues with using WACC as a single discount rate? It simplifies the capital budgeting process. It is applicable to all projects regardless of risk. It ensures accurate project evaluation. It is only appropriate for projects with the same risk as the firm's current operations.

It is only appropriate for projects with the same risk as the firm's current operations.

How can firms develop other cost of capital estimates? By ignoring market conditions. By relying solely on historical data. By using the firm's current WACC for all projects. By using the pure play or subjective approach.

By using the pure play or subjective approach.

What is the purpose of early markdowns? To enhance brand image To increase gross margin To reduce customer returns To get rid of current/last season's inventory

To get rid of current/last season's inventory

Why is inventory valuation crucial for retailers? Inventory represents the primary investment It does not require management It is not a significant asset It is irrelevant to sales

Inventory represents the primary investment

Finance

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