FIN test 1

In finance, the value of a firm depends on its ability to generate ______.

cash flows

What are components of cash flow from assets?

Operating cash flow Capital spending Change in net working capital

Short-term solvency ratios are also called

liquidity ratios

The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes _____ to sell.

longer

Agency costs occur when _________ and stockholder interests are not in line with one another.

management

A firm with a profit margin of 10% generates ______ in net income for every dollar in sales.

10 cents

Days' sales in receivables is given by the following ratio:

365/Receivables turnover

Cal's Market has return on equity (ROE) of 15 percent. What does this mean?

Cal's generated $.15 in profit for every $1 of book value of equity

Is profit maximization the primary objective of a business?

No; profit maximization may not take into account other strategic objectives necessary to maximize shareholder value.

Which of the following items is added back to EBIT while calculating the cash coverage ratio, but not while calculating the times interest earned ratio?

Non-cash expenses

The DuPont identity is a popular expression breaking ___ into three parts.

ROE

The threat of ______ motivates managers to make good decisions.

a takeover

The costs incurred due to a conflict of interest between stockholders and management are called ______ costs.

agency

The relationship between stockholders and management can best be described as a(n) ______ relationship.

agency

The New York Stock Exchange is a(n) _____.

auction market

The cash flow identity states that cash flow from assets equals cash flows to ____.

creditors and stockholders

The current ratio computes the relationship between ____.

current assets and current liabilities

"Increasing shareholder wealth" means increasing the _________.

current common stock value

The cash ratio is found by dividing cash by:

current liabilities

A bad financial decision is defined as a decision that ______ shareholder wealth.

decreases

Net capital spending is equal to the change in net fixed assets plus:

depreciation

True or False: "Profit maximization" is the goal for the management of a corporation in short-run only.

false

Long-term solvency ratios are also known as:

financial leverage ratios

If a company has inventory, the quick ratio will always be ______ the current ratio.

less than

The price-earnings (PE) ratio is a ____ ratio.

market value

The goal of a "for profit" business is to ______ the value of shareholder wealth.

maximize

A positive operating cash flow indicates that the firm is generating enough cash to:

pay everyday cash outflows.

If a company has had negative earnings for several periods they might choose to use a __________. price-earnings ratio

price-sales ratio

Which one of these is an important mechanism used by unhappy stockholders to replace current management?

proxy fight

Receivables turnover is

sales divided by accounts receivable

When one owner or creditor sells to another, the transaction takes place in the _________ market

secondary

In a shareholder-manager relationship, who is the agent and who is the principal?

shareholder is the principal, manager is the agent

The goal of the financial management is to increase the value of _____.

the existing shares of stock

Changes in capital spending can be negative if

the firm sold more fixed assets than it purchased

In a for-profit business, owners' equity is equivalent to:

the total value of stock in a corporation

What is the primary objective of an auction market?

to bring buyers and sellers together

Free cash flow is better described as ____.

total distributable cash flow

True or false: Operating cash flow does not include depreciation or interest.

true

True or false: The debt-equity ratio equals the total assets minus total equity all over total assets.

true

Common-size statements are best used for comparing:

year-to-year for your firm competitors firms of different sizes

Name the 3 traditional financial ratio categories

Financial leverage ratios Turnover ratios Profitability ratios

A good financial decision will do what 2 things

Increase market value of shareholders' equity & Increase the value of the firm's existing stock

What will happen to the current ratio if current assets increase, while everything else remains unchanged?

It will increase.

Long-term solvency ratios measure what aspect of the firm's financial position?

Its financial leverage

What does it mean when a company reports ROA of 12 percent?

The company generates $12 in net income for every $100 invested in assets.

What is true of financial ratios?

They are developed from a firm's financial information. They are used for comparison purposes.

How is the price-earnings (PE) ratio computed?

Market price per share/Earnings per share

How is the market-to-book ratio measured?

Market value per share/Book value per share

What are some characteristics in an over-the-counter market?

Most of the buying and selling is done by the dealer & Many dealers are also connected electronically.

What are 2 defining features of the primary market?

Proceeds from the sale of securities goes to the issuing firm & It is the market where initial public offerings are made

where does cash generated by a corporation typically go?

Reinvested in the firm, Paid to shareholders and creditors, & To pay corporate taxes

Why would the threat of a takeover motivate a manager to act in stockholders' interest?

Running the firm well and acting in the stockholders' interest makes the firm a less attractive takeover target to begin with.

If you hire a real estate company to sell your house, you are most apt to encounter which one of the following?

agency problem

The conflict of interest between an agent and a principal is called a(n)

agency problem

The information needed to compute the profit margin can be found on the ____.

income statement

The cash flow that results from the firm's day-to-day activities of producing and selling is called:

operating cash flow

The times interest earned ratio is a measure of long-term

solvency

Managerial compensation is often tied to financial performance. One way to make this tie explicit is to offer payment in terms of:

stock options

_______ ______ can be used to encourage managers to maximize the value of the stock.

stock options

Who elects the board of directors, and ultimately maintains control of the firm?

stockholders

A corporation receives cash from financial markets by selling ______ and ______.

stocks; bonds

Cash flow refers to _____.

the difference between the number of dollars that came in and the number that went out