Exam 1: Chapters 1, 3, 4, 16

requires CEOs & CFOs to certify that their firm's financial statements are accurate

Sarbanes Oxley Act

Intrinsic value is equal to market value when markets are: a. in the money b. efficient c. in equilibrium d. at the margin

b. efficient

true/false: Managers should try to forecast the effects of different decisions on the firm's intrinsic value and then take actions designed to maximize this value. Management should provide information that helps investors make better estimates of the firm's intrinsic value, which will keep the stock price closer to the equilibrium level. However, there are times when management cannot divulge the true situation because doing so would provide information that helps its competitors.

true

true/false: Once a firm has developed a model to forecast its financial statements, it can do all types of special "what if" studies, such as determining the effects of changing its dividend policy on its financial statements and its required AFN

true

true/false: Ratios help us make better comparisons between the operations of firms that differ in size and other aspects.

true

true/false: The AFN equation provides useful insights into the forecasting process, but the basic equation assumes that all of the company's key ratios remain constant, a condition that is not likely to hold true. Therefore, it is useful to forecast the firm's financial statements

true

true/false: The asset management ratios measure how effectively a firm is managing its assets relative to sales

true

true/false: The capital intensity ratio is defined as the amount of assets required per dollar of sales. If the firm is operating at full capacity, then the capital intensity ratio is equal to the inverse of the total assets turnover ratio

true

true/false: The easier it is to convert an asset to cash at close to a given value, the more liquid the asset.

true

true/false: The number of shares outstanding for the forecasted period will change depending on how much new equity the firm must raise. For the forecasted period, the amount of additional interest-bearing debt is dependent on the increase in spontaneous funds generated, the target debt-to-capital ratio, and the increase in assets

true

true/false: The sales forecast is the most important input in the firm's forecast of financial statements.

true

true/false: a partnership is an unincorporated business

true

true/false: an asset is liquid if it is easily converted to cash

true

when intrinsic value is GREATER than actual value, stock is ____________

undervalued

hybrid between a partnership and corporation

LLC

used for professional firms in the field of accounting, law & architecture

LLP

Individuals who target corporations for takeover because they are UNDERvalued.

corporate raiders

Suppose a firm's managers receive bonuses that increase with the size of the firm's ROE, which was 30% last year and is forecasted to remain at this level during the coming year provided the firm takes on no new expansion projects. Its cost of capital is 10%. Now the firm has the opportunity to make a new investment that promises a 20% return on the invested capital. Which of the following statements is NOT correct a. The new project should be rejected because, if it is accepted, the firm's ROE will decline from 30% because the new ROE will be a weighted average of the old 30% and the 20% returns on the new investment. b. The example in this question demonstrates the serious weakness in using ROE as the primary criterion in setting executive compensation c. The new project should be accepted because its expected return exceeds the cost of the capital that will be used to finance i

a. The new project should be rejected because, if it is accepted, the firm's ROE will decline from 30% because the new ROE will be a weighted average of the old 30% and the 20% returns on the new investment.

which of the following is NOT a key determinant of a firm's external funds requirements? a. interest rate a firm can obtain on a short-term bank loan b. firm's retention ratio c. amount of funds the firm can generate from AP & accruals d. firm's profit margin e. firm's capital intensity ratio

a. interest rate a firm can obtain on a short-term bank loan

which of the following is NOT an element of the firm's strategic plan? a. intrinsic value statement b. firm's corporate scope c. firm's corporate strategies d. detailed operating plan e. firm's mission statement

a. intrinsic value statement

Which of the following regarding the DuPont Equation is correct? a. The DuPont Equation is used to provide more information about the makeup of a firm's return on equity. The DuPont Equation looks at the firm's operating margin, total assets turnover, and the times-interest-earned ratio to explain how the interaction among these ratios impact the firm's ROE b. The DuPont Equation is used to provide more information about the makeup of a firm's return on equity. The DuPont Equation looks at the firm's profit margin, total assets turnover, and equity multiplier to explain how the interaction among these ratios impact the firm's ROE c. The DuPont Equation is used to provide more information about the makeup of a firm's return on equity. The DuPont Equation looks at the firm's return on assets, fixed assets turnover, and equity multiplier to explain how the interaction among these ratios impact the firm's ROE. d. The DuPont Equation is used to provide more information about the makeup of a firm's return on equity. The DuPont Equation looks at the firm's gross margin, return on assets, and the debt ratio to explain how the interaction among these ratios impact the firm's ROE. e. The DuPont Equation is used to provide more information about the makeup of a firm's return on equity. The DuPont Equation looks at the firm's operating margin, inventory turnover, and the debt ratio to explain how the interaction among these ratios impact the firm's ROE

b. The DuPont Equation is used to provide more information about the makeup of a firm's return on equity. The DuPont Equation looks at the firm's profit margin, total assets turnover, and equity multiplier to explain how the interaction among these ratios impact the firm's ROE

Suppose a firm's P/E ratio showed a rising trend over the last 5 years. This would suggest that the firm's image was a. not changing b. getting better c. getting worse

b. getting better

Which of the following is NOT an advantage of the corporate form of organization versus partnerships and proprietorships? a. ease of transferring ownership among investors b. more favorable tax treatment c. limited liability d. liquidity of investors' holdings in the business e. ability to attract large amounts of capital

b. more favorable tax treatment

firms that use a lot of debt are said to have a great deal of a. financial strength b. turnover c. financial leverage d. liquidity e. benchmarks

c. financial leverage

Which of the following helps ensure that managers operate in their stockholders' interests rather than their own personal interests? a. threat of firing by board of directors b .threat of hostile takeover possibly resulting in top managers losing their jobs. if stock price is below its I.V., this threat is magnified c. compensation packages designed to provide incentives for management to maximize long-run stock price d. all of these

d. all of these

Which of the following is an example of a liquid asset? a. car b. house c. roth IRA d. checking account

d. checking account

which of the following are stakeholders in a corporation? a. shareholders b. employees c. customers d. vendors e. all of the above

e. all of the above

true/false: Conflicts between stockholders and debtholders arise because stockholders are less willing than debtholders to take on risky projects because stockholders are more "at risk" of losing their investment.

false

true/false: If a firm takes steps that increase its expected future ROE, this means that its shareholders' wealth must also increase

false

true/false: Stocks have market prices, and they also have intrinsic values. If the market price is below the intrinsic value as estimated by marginal investors, and if the intrinsic value remains stable in the future, then there will be a tendency for the stock's price to fall over time.

false

true/false: Suppose two firms have identical sales, operating costs, employee competence, assets, and financing policies. These firms would have to report the same amount of profits, and their ratios would all be the same, provided they both followed generally accepted accounting principles in their financial reporting

false

true/false: the average firm in each industry must have an M/B ratio that is equal to 1.0

false

a special designation that allows small businesses that meet qualifications to be taxed as if they were a proprietorship or a partnership rather than a corporation.

s-corp

when intrinsic value is LESS than actual value, stock is

overvalued

unincorporated business owned by 1 individual

proprietorship

The primary financial goal for managers of publicly owned companies implies that decisions should be made to maximize the long-run value of the firm's common stock.

shareholder wealth maximization

true/false: Finance prepares students for jobs in banking, investments, insurance, corporations, and government. It is important for all business students, no matter what their major is, to understand finance concepts. In addition, finance is useful to all individuals regardless of their jobs as we encounter finance in our everyday lives, such as decisions regarding consumer loans and mortgages.

true

true/false: The chief executive officer (or CEO) is the top executive officer, and he or she reports to the board. The chairperson of the board often also serves as the CEO. Most firms also have a chief operating officer (COO) and a chief financial officer (CFO). The COO is often designated as the firm's president and directs the firm's operations. The CFO is in charge of accounting, financing, credit policy, decisions regarding asset acquisitions, and investor relations. True or false?

true

true/false: An analysis based on ratios should be supplemented with judgmental considerations such as the possible effects of new competitors like the Internet on newspapers, labor problems such as those experienced by the U.S. auto industry, environmental problems such as those facing the U.S. electric utilities, and the like. If the fundamentals of an industry change, then strong historical ratios won't help its future performance

true

true/false: Financial planning is often called value-based management, meaning that the effects of various decisions on the firm's financial position and value are studied by simulating their effects within the firm's financial model

true

true/false: If a company practices "good business ethics," then it will treat its customers, employees, and stockholders "fairly," and this will cause it to have a good reputation. Such behavior may increase costs and thus hurt profits in the short run, but this is often offset by long-run benefits in the form of customer loyalty, more dedicated employees, and stockholders who will support management in the event of a downturn in the business.

true

true/false: If a firm's managers narrowly focused on creating shareholder value, but in the process the company was unresponsive to its employees and customers, hostile to its local community, and indifferent to the effects its actions had on the environment; then in all likelihood society would impose a wide range of costs on the company, and this would ultimately lead to a reduction in shareholder value

true

true/false: If you estimated a regression line to determine the firm's inventory balance and the actual data points are not very close to this regression line, then this would tend to indicate that changes in inventory are affected by factors other than those used in the regression equation

true