FIN 317 multiple choice.

Which of the following actions are likely to reduce agency conflicts between stockholders and managers? a. Paying managers a large fixed salary. b. Increasing the threat of corporate takeover. c. Placing restrictive covenants in debt agreements. d. All of the statements above are correct. e. Statements b and c are correct.

B

Which of the following is a true statement concerning a general partnership? I. Partners are not responsible for the debts of the partnership. II. Partners generally do not manage the partnership. III. The income of a partnership is taxed at the partners' income tax rate. a. I only b. III only c. I and II only d. I and III only e. I, II, and III

B

Which of the following is a true statement concerning corporations? a. The equity that can be raised by the corporation is limited to the current shareholders' personal wealth. b. The life of the corporation is unlimited. c. The corporation has limited liability for business debts. d. When dividends are paid, corporate profits are taxed once. e. It is difficult to transfer ownership of corporate shares.

B

5. Which of the following statements is most correct? a. A good goal for a corporate manager is maximization of expected EPS. b. Most business in the U.S. is conducted by corporations; corporations' popularity results primarily from their favorable tax treatment. c. A good example of an agency relationship is the one between stockholders and managers. d. Corporations and partnerships have an advantage over proprietorships because a sole proprietor is subject to unlimited liability, but investors in the other types of businesses are not.

C

Which of the following statements is CORRECT? a. If you purchase 100 shares of Disney stock from your brother-in-law, this is an example of a primary market transaction. b. If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction. c. The NASDAQ relies on market makers (dealers) to facilitate trading. d. Only institutions, and not individuals, can engage in derivative market transactions. e. The fewer market makers (dealers) that exist for a company - the smaller the bid- ask spread for that company's stock (all other things equal).

C

Which of the following statements is most correct? a. Accounts receivable show up as current liabilities on the balance sheet. b. Dividends paid reduce the net income that is reported on a company's income statement. c. If a company pays more in dividends than it generates in net income, its balance of retained earnings reported on the balance sheet will fall. d. Statements a and b are correct. e. All of the statements above are correct

C

Which of the following would be considered a use of cash? I. Accounts receivable increase. II. Accounts payable decrease. III. Common stock increases. IV. Net fixed assets decrease by the amount of depreciation. a. I only b. II only c. I and II only d. I and III only e. II, III, and IV only

C

A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm's ROA? (This would be a problem on the exam - not a multiple choice question.) a. 8.4% b. 10.9% c. 12.0% d. 13.3% e. 15.1%

D

Which of the following is NOT typically characterized as a current asset? a. Inventory b. Cash on hand c. Accounts receivable d. Marketable securities e. Accruals

E

Which of the following is a true statement? a. Accounting income is generally equal to firm cash flow. b. The balance sheet equity account represents the market value of the firm to shareholders. c. The balance sheet tells investors exactly what the firm is worth. d. Assets are usually listed on the balance sheet at market value. e. None of the statements are true.

E

Which of the following statements is CORRECT? a. Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States. b. Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia. c. As discussed in class, John Paulsen's hedge funds have consistently posted (positive) double-digit returns over the past 10 years. e. Hedge funds are not as highly regulated as most other types of financial institutions. The justification for this light regulation is that only "sophisticated" investors (i.e., those with high net worths and high incomes) are permitted to invest in these funds, and these investors supposedly can do any necessary "due diligence" on their own rather than have it done by the SEC or some other regulator.

E

Which of the following statements is CORRECT? a. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically. b. An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift. c. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction. d. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors. e. None of the statement are correct.

E

Ratios that measure how efficiently a firm's management uses its assets in operations to generate bottom line net income are known as: a. Asset management ratios. b. Liquidity ratios. c. Debt management ratios. d. Profitability ratios. e. Market value ratios.

a

Trade credit is an arrangement between businesses to buy goods or services on account, that is, without making immediate cash payment. Vendors providing trade credit to a firm tend to be most interested in the firm's __________ ratios. a. liquidity b. profitability c. market value d. asset management e. debt management

a

Which of the following statements is most correct? a. An increase in a firm's debt ratio, with no changes in its sales and operating costs, could be expected to lower its profit margin on sales. b. An increase in the DSO, other things held constant, could generally lead to an increase in the total assets turnover ratio. c. An increase in the DSO, other things held constant, could generally lead to an increase in the ROE. d. It is more important to adjust the debt ratio than the inventory turnover ratio to account for seasonal fluctuations.

a

1. Agency costs refer to: a. The total dividends paid to shareholders over the lifetime of the firm. b. The costs that result from default and bankruptcy of the firm. c. Corporate income subject to double taxation. d. The costs of the conflict of interest between stockholders and management and between the stockholders and bondholders. e. The total interest paid to creditors over the lifetime of the firm.

d

Nelson Company is thinking about issuing new common stock. The proceeds from the stock issue will be used to reduce the company's outstanding debt and interest expense. The stock issue will have no effect on the company's total assets, EBIT, or tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue? a. The company's net income will increase. b. The company's times interest earned ratio will increase. c. The company's ROA will increase. d. All of the above statements are correct. e. None of the above statements is correct.

d