FIN311 Exam 1 Prep
Meyer Inc's total invested capital is $660,000, and its total debt outstanding is $185,000. The new CFO wants to establish a total debt to total capital ratio of 55%. The size of the firm will not change. How much debt must the company add or subtract to achieve the target debt to capital ratio?
$178,000
Charleston Corporation (CC) now operates as a "regular" corporation, but it is considering a switch to S Corporation status. CC is owned by 100 stockholders who each hold 1% of the stock, and each faces a personal tax rate of 35%. The firm earns $2,800,000 per year before taxes, and since it has no need for retained earnings, it pays out all of its earnings as dividends. Assume that the corporate tax rate is 34% and the personal tax rate is 35%. How much more (or less) spendable income would each stockholder have if the firm elected S Corporation status?
$6,188
On 12/31/15, Hite Industries reported retained earnings of $510,000 on its balance sheet, and it reported that it had $135,000 of net income during the year. On its previous balance sheet, at 12/31/14, the company had reported $445,000 of retained earnings. No shares were repurchased during 2015. How much in dividends did the firm pay during 2015?
$70,000
Hayes Corporation has $300 million of common equity, with 6 million shares of common stock outstanding. If Hayes' Market Value Added (MVA) is $198 million, what is the company's stock price? (Round your final answer to two decimal places.)
$83.00
Song Corp's stock price at the end of last year was $16.75 and its earnings per share for the year were $1.30. What was its P/E ratio?
12.88
Duffert Industries has total assets of $940,000 and total current liabilities (consisting only of accounts payable and accruals) of $130,000. Duffert finances using only long-term debt and common equity. The interest rate on its debt is 8% and its tax rate is 40%. The firm's basic earning power ratio is 14% and its debt-to capital rate is 40%. What are Duffert's ROE and ROIC? Do not round your intermediate calculations.
14.95%; 9.75%
Last year Jandik Corp. had $250,000 of assets (which is equal to its total invested capital), $18,750 of net income, and a debt-to-total-capital ratio of 37%. Now suppose the new CFO convinces the president to increase the debt-to-total-capital ratio to 48%. Sales, total assets and total invested capital will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE? Do not round your intermediate calculations.
2.52%
Precision Aviation had a profit margin of 8.00%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm's ROE?
21.60%
Assume that the corporate tax rate is 34% and the personal tax rate is 30%. The founders of a newly formed business are debating between setting up the firm as a partnership versus a corporation. The firm will not need to retain any earnings, so all of its after-tax income will be paid out to its investors, who will have to pay personal taxes on whatever they receive. What is the difference in the percentage of the firm's pre-tax income that investors actually receive and can spend under the corporate and partnership forms of organization?
23.80%
A new firm is developing its business plan. It will require $710,000 of assets (which equals total invested capital), and it projects $450,000 of sales and $355,000 of operating costs for the first year. Management is reasonably sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. The firm will use only debt and common equity for financing. What is the maximum debt to capital ratio (measured as debt/total invested capital) the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt to capital ratio.) Do not round your intermediate calculations.
44.60%
Last year Kruse Corp had $410,000 of assets (which is equal to its total invested capital), $403,000 of sales, $28,250 of net income, and a debt-to-total-capital ratio of 39%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets and total invested capital to $252,500. The firm finances using only debt and common equity. Sales, costs, and net income would not be affected, and the firm would maintain the same capital structure (but with less total debt). By how much would the reduction in assets improve the ROE? Do not round your intermediate calculations.
7.05%
Royce Corp's sales last year were $250,000, and its net income was $23,000. What was its profit margin?
9.20%
Casey Motors recently reported the following information: ∙ Net income = $875,000.∙ Tax rate = 40%.∙ Interest expense = $200,000.∙ Total invested capital employed = $9 million.∙ After-tax cost of capital = 10%. What is the company's EVA?
95,000
Which of the following statements is CORRECT?
A corporation is a legal entity created by a state, and it has a life and existence that is separate from the lives and existence of its owners and managers.
Which of the following statements would most people in business agree?
Although people's moral characters are probably developed before the are admitted ti a business school, it is still useful for business schools to cover ethics, if only to give students an idea about the adverse consequences of unethical behavior to themselves, their firms, and the nation.
Which of the following statements is CORRECT? If you purchase 100 shares of Disney stock from your brother-in-law, this is an example of a primary market transaction. If Disney issues additional shares of common stock through an investment banker, this would be a secondary market transaction. The NYSE is an example of an over-the-counter market. Only institutions, and not individuals, can engage in derivative market transactions. As they are generally defined, money market transactions involve debt securities with maturities of less than one year.
As they are generally defined, money market transactions involve debt securities with maturities of less than one year
Which of the following statements is CORRECT?
Bond covenants are designed to protect bondholders and to reduce potential conflicts between stockholders and bondholders.
Which of the following statements is CORRECT? The most important difference between spot markets versus futures markets is the maturity of the instruments that are traded. Spot market transactions involve securities that have maturities of less than one year whereas futures markets transactions involve securities with maturities greater than one year. Capital market transactions involve only preferred stock or common stock. If General Electric were to issue new stock this year, this would be considered a secondary market transaction since the company already has stock outstanding. Both NASDAQ dealers and "specialists" on the NYSE hold inventories of stocks. Money market transactions do not involve securities denominated in currencies other than the U.S. dollar.
Both NASDAQ dealers and "specialists" on the NYSE hold inventories of stocks.
Which of the following would be most likely to occur in the year after Congress, in an effort to increase tax revenue, passed legislation that forced companies to depreciate equipment over longer lives? Assume that sales, other operating costs, and tax rates are not affected, and assume that the same depreciation method is used for tax and stockholder reporting purposes.
Companies' cash positions would decline
Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Both firms finance using only debt and common equity and total assets equal total invested capital. Company HD has a higher total debt to total capital ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?
Company HD has a lower times-interest-earned (TIE) ratio.
Which of the following statements is most correct?
Corporations are allowed to exclude 70% of their dividend income from corporate taxes.
Which of the following statements is CORRECT? Other things held constant, the more debt a firm uses, the higher its operating margin will be. Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage. Other things held constant, the more debt a firm uses, the higher its profit margin will be. Other things held constant, the higher a firm's total debt to total capital ratio, the higher its TIE ratio will be. Debt management ratios show the extent to which a firm's managers are attempting to reduce risk through the use of financial leverage. The higher the total debt to total capital ratio, the lower the risk.
Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.
Which of the following statements is CORRECT?
Due to legal considerations related to ownership transfers and limited liability, which affect the ability to attract capital, most business (measured by dollar sales) is conducted by corporations in spite of large corporations' less favorable tax treatment.
If a corporation elects to be taxed as an S corp, then both it and its stockholders can avoid all federal taxes. This provision was put into the Federal Tax Code in order to encourage the formation of small businesses.
False
If a stock's intrinsic value is greater than its market price, then the stock is overvalued and should be sold
False
It is generally less expensive to form a corporation than a proprietorship because, with a proprietorship, extensive legal documents are required.
False
Managers always attempt to maximize the long-run value of their firms' stocks, or the stocks' intrinsic values. This is exactly what stockholders desire. Thus conflicts between stockholders and managers are not possible.
False
One advantage of the corporate form of organization is that it avoids double taxation.
False
There are many types of unethical business behavior. One example is where executives provide information that they know is incorrect to banks and to stockholders. It is illegal to provide such information to banks, but it is not illegal to provide it to stockholders because they are the owners of the firm, not outsiders.
False
Which of the following statements is CORRECT? Most rapidly growing companies have positive free cash flows because cash flows from existing operations generally exceed fixed asset purchases and changes to net operating working capital. Changes in working capital have no effect on free cash flow. Free cash flow (FCF) is defined as follows: FCF = EBIT(1 - T) + Depreciation - Capital expenditures required to sustain operations - Required changes in net operating working capital. Free cash flow (FCF) is defined as follows: FCF = EBIT(1 - T) + Capital expenditures. Managers should be less concerned with free cash flow than with accounting net income. Accounting net income is the "bottom line" and represents how much the firm can distribute to all its investors--both creditors and stockholders.
Free cash flow (FCF) is defined as follows: FCF = EBIT(1 - T) + Depreciation - Capital expenditures required to sustain operations - Required changes in net operating working capital.
Which of the following statements is CORRECT? Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations. After-tax operating income is calculated as EBIT(1 - T) + Depreciation. Two firms with identical sales and operating costs but with different amounts of debt and tax rates will have different operating incomes by definition. If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported on the income statement should be equal to its free cash flow. Retained earnings as reported on the balance sheet represent cash and, therefore, are available to distribute to stockholders as dividends or any other required cash payments to creditors and suppliers.
Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations.
Which of the following statements is CORRECT? Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States. Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia. Hedge funds have more in common with investment banks than with any other type of financial institution. Hedge funds have more in common with commercial banks than with any other type of financial institution. 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.
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.
Which of the following statements is CORRECT?
Hostile takeovers are most likely to occur when a firm's stock is selling below its intrinsic value as a result of poor management.
Which of the following statements is CORRECT?
If someone deliberately understates costs and thereby causes reported profits to increase, this can cause the stock price to rise above its intrinsic value. The stock will probably fall in the future. Both those who participated in the fraud and the firm itself can be prosecuted.
Companies HD and LD have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. Both firms finance using only debt and common equity and total assets equal total invested capital. However, company HD has a higher total debt to total capital ratio. Which of the following statements is CORRECT?
If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company HD will have the higher ROE.
Which of the following statements is CORRECT? The term "IPO" stands for Introductory Price Offered, and it is the price at which shares of a new company are offered to the public. IPO prices are generally established by the market, and buyers of the new stock must pay the price that prevails at the close of trading on the day the stock is offered to the public. In a "Dutch auction," investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay. It is possible that the price set in an IPO is so high that investors will refuse to buy the number of shares that the company wants to sell. In this situation, the IPO is said to be oversubscribed. It is possible that the price set in an IPO is so low that investors will want to buy more shares than the company wants to sell. In that case, the company will have to issue more shares than it wants to sell.
In a "Dutch auction," investors who want to buy shares in an IPO submit bids indicating how many shares they want to buy and the price they are willing to pay. The company determines how many shares it wants to sell. The highest price that enables the company to sell the desired number of shares is the price that all buyers must pay.
Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders?
Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.
Assume that Congress recently passed a provision that will enable Bev's Beverages Inc. (BBI) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or the tax rate. Prior to the new provision, BBI's net income was forecasted to be $4 million. Which of the following best describes the impact of the new provision on BBI's financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.
Net fixed assets on the balance sheet will decrease.
Which of the following statements is CORRECT?
One advantage to forming a corporation is that the owners of the firm have limited liability.
Which of the following statements is CORRECT?
One danger of starting a proprietorship is that you may be exposed to a personal liability if the business goes bankrupt. This problem would be avoided if you formed a corporation to operate the business.
If a bank loan officer were considering a company's loan request, which of the following statements would you consider to be CORRECT?
Other things held constant, the lower the total debt to total capital ratio, the lower the interest rate the bank would charge.
Money markets are markets for
Short-term debt securities such as Treasury bills and commercial paper.
Which of the following statements is CORRECT? Even though Firm A's current ratio exceeds that of Firm B, Firm B's quick ratio might exceed that of A. However, if A's quick ratio exceeds B's, then we can be certain that A's current ratio is also larger than B's. Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio. Since the ROA measures the firm's effective utilization of assets without considering how these assets are financed, two firms with the same EBIT must have the same ROA. Suppose all firms follow similar financing policies, face similar risks, have equal access to capital, and operate in competitive product and capital markets. However, firms face different operating conditions because, for example, the grocery store industry is different from the airline industry. Under these conditions, firms with high profit margins will tend to have high asset turnover ratios, and firms with low profit margins will tend to have low turnover ratios. Klein Cosmetics has a profit margin of 5.0%, a total assets turnover ratio of 1.5 times, no debt and therefore an equity multiplier of 1.0, and an ROE of 7.5%. The CFO recommends that the firm borrow funds using long-term debt, use the funds to buy back stock, and raise the equity multiplier to 2.0. The size of the firm (assets) would not change. She thinks that operations would not be affected, but interest on the new debt would lower the profit margin to 4.5%. This would probably not be a good move, as it would decrease the ROE from 7.5% to 6.5%.
Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio.
Which of the following statements is CORRECT? Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. The firm finances using only debt and common equity and total assets equal total invested capital. Under these conditions, the ROE will increase. Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10% and its debt increases from 40% of total assets to 60%. The firm finances using only debt and common equity and total assets equal total invested capital. Without additional information, we cannot tell what will happen to the ROE. The DuPont equation provides information about how operations affect the ROE, but the equation does not include the effects of debt on the ROE. Other things held constant, an increase in the total debt to total capital ratio will result in an increase in the profit margin. Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. The firm finances using only debt and common equity and total assets equal total invested capital. Under these conditions, the ROE will decrease.
Suppose a firm's total assets turnover ratio falls from 1.0 to 0.9, but at the same time its profit margin rises from 9% to 10%, and its debt increases from 40% of total assets to 60%. The firm finances using only debt and common equity and total assets equal total invested capital. Under these conditions, the ROE will increase.
Which of the following statements is CORRECT? While the distinctions are becoming blurred, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties. The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market. Money market mutual funds usually invest their money in a well-diversified portfolio of liquid common stocks. Money markets are markets for long-term debt and common stocks. A liquid security is a security whose value is derived from the price of some other "underlying" asset.
The NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market.
Which of the following statements is CORRECT? Capital markets deal only with common stocks and other equity securities. If an investor sells shares of stock through a broker, then it would be a primary market transaction. Home mortgage loans are traded in the money market. The New York Stock Exchange is an auction market, and it has a physical location. While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties.
The New York Stock Exchange is an auction market, and it has a physical location
Which of the following statements is CORRECT?
The bid price in a hostile takeover is generally above the price before the takeover attempt is announced, because otherwise there would be no incentive for the stockholders to sell to the hostile bidder and the takeover attempt would probably fail.
Which of the following statements is CORRECT?
The board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. The CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions. The CEO, however, cannot remove the board, but he or she can endeavor to have the board voted out and a new board voted in should a conflict arise. It is possible for a person to simultaneously serve as CEO and chairman of the board, though many corporate control experts believe it is bad to vest both offices in the same person.
Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation?
The company made large investments in fixed assets
Last year, Delip Industries had (1) negative cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation?
The company sold a new issue of common stock
Last year Besset Company's operations provided a negative cash flow, yet the cash shown on its balance sheet increased. Which of the following statements could explain the increase in cash, assuming the company's financial statements were prepared under generally accepted accounting principles (GAAP)?
The company sold some of its fixed assets
Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers?
The composition of the board of directors is changed from inside directors to all outside directors, and the directors are compensated with stock rather than cash
Which of the following statements is CORRECT?
The managers of established, stable companies sometimes attempt to get their state legislatures to impose rules that make it more difficult for raiders to succeed with hostile takeovers.
Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interests of shareholders?
The percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%
Which of the following statements is CORRECT? Assets other than cash are expected to produce cash over time, and the amounts of cash they eventually produce should be exactly the same as the amounts at which the assets are carried on the books. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows. The annual report is an internal document prepared by a firm's managers solely for the use of its creditors/lenders. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and statement of stockholders' equity. Prior to the Enron scandal in the early 2000s, companies would put verbal information in their annual reports, along with the financial statements. That verbal information was often misleading, so today annual reports can contain only quantitative information--audited financial statements.
The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows.
Which of the following statements is CORRECT?
The threat of takeovers tends to reduce potential conflicts between stockholders and managers.
You recently sold 100 shares of Microsoft stock to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following best describes this transaction?
This is an example of a direct transfer of capital
A hostile takeover is said to occur when another corporation or group of investors gains voting control over a firm and replaces the old managers. If the old managers were managing the firm inefficiently, then hostile takeovers can improve the economy. However, hostile takeovers are controversial, and legislative actions have been taken to make them more difficult to undertake.
True
It is generally harder to transfer one's ownership interest in a partnership than in a corporation.
True
Organizing as a corporation makes it easier for the firm to raise capital. This is because corporations' stockholders are not subject to personal liabilities if the firm goes bankrupt and also because it is easier to transfer shares of stock than partnership interests.
True
The more capital a firm is likely to require, the greater probability that it will be organized as a corporation.
True
Which of the following statements is CORRECT? Two metrics that are used to measure a company's financial performance are net income and free cash flow. Accountants tend to emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on free cash flows as they do on net income. To estimate the net cash provided by operations, depreciation must be subtracted from net income because it is a non-cash charge that has been added to revenue. Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to discourage the use of debt financing by corporations.
Two metrics that are used to measure a company's financial performance are net income and free cash flow. Accountants tend to emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on free cash flows as they do on net income.
Firms A and B have the same current ratio, 0.75, the same amount of sales, and the same amount of current liabilities. However, Firm A has a higher inventory turnover ratio than B. Therefore, we can conclude that A's quick ratio must be smaller than B's.
false
For a stock to be in equilibrium as the book defines it, its market price should exceed its intrinsic value.
false
Free cash flow is the amount of cash that if withdrawn would harm the firm's ability to operate and to produce future cash flows.
false
If a lower level person in a firm does something illegal, like "cooking the books" to understate costs and thereby increase profits above the correct profits because he or she was told to do so by a superior, the lower level person cannot be prosecuted but the superior can be prosecuted.
false
If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it would be a good buy.
false
If management operates in a manner designed to maximize the firm's expected profits for the current year, this will also maximize the stockholders' wealth as of the current year.
false
In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price on a specific target date.
false
One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for the firm's investors to transfer their ownership interests
false
Primary markets are large and important, while secondary markets are smaller and less important.
false
The NYSE is defined as a "primary" market because it is one of the largest and most important stock markets in the world.
false
The NYSE is defined as a "spot" market purely and simply because it has a physical location. The NASDAQ, on the other hand, is not a spot market because it has no one central location.
false
The chairman of the board must also be the CEO
false
The term IPO stands for "individual purchase order," as when an individual (as opposed to an institution) places an order to buy a stock.
false
Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A simple average of those returns (which gives equal weight to each company in the S&P 500) is then calculated. That average is called "the return on the S&P Index," and it is often used as an indicator of the "return on the market."
false
Which of the following statements is correct?
it is usually easier to transfer ownership in a corporation than in a partnership
The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to
maximize the stock price per share over the long run, which is the stock's intrinsic value
A financial intermediary is a corporation that takes funds from investors and then provides those funds to those who need capital. A bank that takes in demand deposits and then uses that money to make long-term mortgage loans is one example of a financial intermediary.
true
A share of common stock is not a derivative, but an option to buy the stock is a derivative because the value of the option is derived from the value of the stock.
true
As a result of financial scandals occurring during the past decade, there has been a strong push to improve business ethics.
true
Assets other than cash are expected to produce cash over time, but the amount of cash they eventually produce could be higher or lower than the amounts at which the assets are carried on the books.
true
Debt management ratios show the extent to which a firm's managers are attempting to magnify returns on owners' capital through the use of financial leverage.
true
Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield (which could be positive, negative, or zero). Such returns are calculated for all the stocks in the S&P 500. A weighted average of those returns, using each stock's total market value, is then calculated, and that average return is often used as an indicator of the "return on the market."
true
Hedge funds are somewhat similar to mutual funds. The primary differences are that hedge funds are less highly regulated, have more flexibility regarding what they can buy, and restrict their investors to wealthy, sophisticated individuals and institutions.
true
If a corporation elects to be taxed as an S corp, then it can avoid the corporate tax. However, its stockholders will have to pay personal taxes on the firm's net income.
true
If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase.
true
In a "Dutch auction" for new stock, individual investors place bids for shares directly. Each potential bidder indicates the price he or she is willing to pay and how many shares he or she will purchase at that price. The highest price that permits the company to sell all the shares it wants to sell is determined, and this is the "market clearing price." All bidders who specified this price or higher are allowed to purchase their shares at the market clearing price.
true
In most corporations, the CFO ranks under the CEO
true
In order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value."
true
Interest paid by a corporation is a tax deduction for the paying corporation, but dividends paid are not deductible. This treatment, other things held constant, tends to encourage the use of debt financing by corporations.
true
The "apparent," but not necessarily the "true," financial position of a company whose sales are seasonal can change dramatically during a given year, depending on the time of year when the financial statements are constructed.
true
The alternative minimum tax (AMT) was created by Congress to make it more difficult for wealthy individuals to avoid paying taxes through the use of various deductions.
true
The annual rate of return on any given stock can be found as the stock's dividend for the year plus the change in the stock's price during the year, divided by its beginning-of-year price. If you obtain such data on a large portfolio of stocks, like those in the S&P 500, find the rate of return on each stock, and then average those returns, this would give you an idea of stock market returns for the year in question.
true
The income statement shows the difference between a firm's income and its costs--i.e., its profits--during a specified period of time. However, not all reported income comes in the form of cash, and reported costs likewise may not be consistent with cash outlays. Therefore, there may be a substantial difference between a firm's reported profits and its actual cash flow for the same period.
true
The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In general, investors regard companies with higher P/E ratios as being less risky and/or more likely to enjoy higher growth in the future.
true
The value of any asset is the present value of the cash flows the asset is expected to provide. The cash flows a business is able to provide to its investors is its free cash flow. This is the reason that FCF is so important in finance.
true
Two metrics that are used to measure a company's financial performance are net income and cash flow. Accountants emphasize net income as calculated in accordance with generally accepted accounting principles. Finance people generally put at least as much weight on cash flows as they do on net income.
true
If you decide to buy 100 shares of Google, you would probably do so by calling your broker and asking him or her to execute the trade for you. This would be defined as a secondary market transaction, not a primary market transaction.
true
