Finance Midterm 1

Quick ratio

(Current assets - Inventory) / Current liabilities

Consider the above statement of cash flows. If all amounts shown above are in millions of dollars, what were AOS Industries' retained earnings for 2008? A) $2.2 million B) $3.1 million C) $5.2 million D) $4.4 million

A) $2.2 million RE = NE - Dividends Paid 3.2 million - 1 million.

In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops. If sales in 2008 and 2009 were steady at $30 million, but the gross margin increased from 2.8 % to 3.9 % between those years, by what amount was the cost of sales reduced? A) $330,000 B) $660,000 C) $462,000 D) $264,000

A) $330,000 (30 million * 0.011)

What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements? A) It makes it easier to compare the financial results of different firms. B) It ensures that important budgetary information is not omitted. C) It ensures that information on the performance of public companies is reported on cash-basis accounting. D) It ensures that the market value of assets and debt are reported accurately.

A) It makes it easier to compare the financial results of different firms.

What is the major way in which the roles and obligations of the owners of a limited liability company differ from the roles and obligations of limited partners in a limited partnership? A) The owners of a limited liability company can take an active role in running the company. B) The owners of a limited liability company have personal obligation for debts incurred by the company. C) The owners of a limited liability company can withdraw from the company without the company being dissolved. D) There is no separation between the company and its owners in a limited liability company.

A) The owners of a limited liability company can take an active role in running the company.

A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows? A) as an outflow under investment activities B) as an outflow under financial activities C) as an outflow under operating activities D) not recorded on the statement of cash flows

A) as an outflow under investment activities

Which of the following is NOT a role of financial institutions? A) printing money for borrowers B) moving funds though time C) spreading out risk-bearing D) moving funds from savers to borrowers

A) printing money for borrowers

Which of the following statements is INCORRECT based on the time value of money? We refer to (1 - rf) as the interest rate factor for risk-free cash flows. For most financial decisions, costs and benefits occur at different points in time. In general, money today is worth more than money in one year. We define the risk-free interest rate (rf) for a given period as the interest rate at which money can be borrowed or lent without risk over that period.

A. We refer to (1 - rf) as the interest rate factor for risk-free cash flows.

Heavy Duty Company, a manufacturer of power tools, decides to offer a rebate of $130 on its 16-inch mid-range chain saw, which currently has a retail price $490 . Heavy Duty's marketers estimate that, as a result of the rebate, sales of this model will increase from 60,000 to 80,000 units next year. The profit margin for Heavy Duty before the rebate is $180 . Based on the given information, is the decision to give the rebate a wise one? A) Yes, since the benefits are $7,300,000 more than the costs. B) No, since costs are $6,800,000 more than benefits. C) Yes, since the benefits are $3,400,000 more than the costs. D) No, since costs are $7,800,000 more than benefits.

B 180 × 60,000 = $10,800,000 ; (180 - 130 ) × 80,000 = $4,000,000 ; $10,800,000 - $4,000,000 = $6,800,000

You own 1000 shares of Newstar Financial stock, currently trading for $57 per share. You are offered a deal where you can exchange these stocks for 900 shares of Amback Financial Group stock, currently trading at $63 per share. What is the value of this trade, if you choose to make it? A) $300 B) -$300 C) -$340 D) -$320

B -300 (-57 × 1000 ) + (900 × 63 ) = -$300

Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then using the market value of equity, the debt-equity ratio for Luther in 2006 is closest to ________. A) 3.45 B) 1.72 C) 0.86 D) 2.41

B 1.72 D / E = Total debt / Total equity Total Debt = Notes payable (10.5 ) + Current maturities of long-term debt (39.6 ) + Long-term debt (231.3 ) = 281.4 million Total equity = 10.2 × $16 = $163.2, so D / E = $ 281.4 / $163.2 = 1.72

Refer to the balance sheet above. When using the book value of equity, the debt-equity ratio for Luther in 2006 is closest to ________. A) 4.51 B) 2.25 C) 1.13 D) 3.16

B 2.25 D / E = Total debt / Total equity Total debt = Notes payable (10.7) + Current maturities of long-term debt (38.7) + Long-term debt ( 234.4)=283.8 million Total equity = 125.9 , so D / E = 283.8 /125.9 = 2.25

Which of the following is a measure of the aggregate price level of collections of pre -selected stocks? A) NASDAQ B) S&P 500 C) Euronext D) NYSE

B S&P 500

A C corporation earns $8.30 per share before taxes and the company pays a dividend of $4.00 per share. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the after-tax amount an individual would receive from the dividend? A) $4.76 B) $3.40 C) $2.72 D) $4.08

B) $3.40 (4*.15 = .60)

9) Which of the following would be best considered to be an agency conflict problem in the behavior of the following financial managers? A) Michael chooses to enhance his firm's reputation at some cost to its shareholders by sponsoring a team of athletes for the Olympics. B) Bill chooses to pursue a risky investment for the company's funds because his compensation will substantially rise if it succeeds. C) Sue instructs her staff to skip safety inspections in one of the company's factories, knowing that it will likely fail the inspection and incur significant costs to fix. D) James ignores an opportunity for his company to invest in a new drug to fight Alzheimer's disease, judging the drug's chances of succeeding as low.

B) Bill chooses to pursue a risky investment for the company's funds because his compensation will substantially rise if it succeeds.

Which of the following best describes why the Valuation Principle is a key concept in making financial decisions? A) It allows fixed assets and liquid assets to be valued correctly. B) It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly. C) It shows how to assign monetary value to intangibles such as good health and well-being. D) It gives a good indication of the net worth of a person, item, or company and can be used to estimate any changes in that net worth.

B) It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.

Consider the above statement of cash flows. What were AOS Industries' major means of raising money in 2008? A) from investment activities B) by issuing debt C) from its operations D) by sale of stock

B) by issuing debt

An investment will pay you $120 in one year and $200 in two years. If the interest rate is 4%, what is the present value of these cash flows? A) $320.00 B) $307.69 C) $300.29 D) $304.91

C 300.29 120/(1.04)+200/(1.042)=115.38+184.91=300.29

A factory owner wants his workers to produce as many widgets as they can so he pays his workers based on how many widgets they produce. However, in order to make sure that the workers do not rush and produce a large number of poorly made widgets, he checks the widgets at random at various stages of their manufacture. If a defect is found in a widget, the pay of the entire section of the factory responsible for that defect is docked. How is this factory owner seeking to solve the agency conflict problem in this case? A) by maximizing the information that the principal obtains about the behavior of the agents B) by making the agents into principals themselves C) by supplying incentives so the agents act in the way principal desires D) by ensuring that all workers co-operate to maximize the gains of their section

C by supplying incentives so the agents act in the way principal desires

A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true? A) Since net working capital is nearly zero, the company is well run and will have little difficulty attracting investors. B) Since net working capital is very high, the company will have ample money to invest after it meets its obligations. C) Since net working capital is negative, the company will not have enough funds to meet its obligations. D) Since net working capital is high, the company will likely have little difficulty meeting its obligations.

C) Since net working capital is negative, the company will not have enough funds to meet its obligations.

Which of the following types of firms does NOT have limited liability? A) limited partnerships C) sole proprietorships B) corporations D) none of the above

C) Sole Proprietorships

Which of the following is NOT an advantage of a sole proprietorship? A) single taxation B) ease of setup C) no separation of ownership and control D) unlimited liability

D) unlimited liability

Why is it difficult to determine the market price of a private corporation's shares at any point in time? A) It has a limited number of owners. B) The price of its shares is fixed by the owners. C) There is no organized market for its shares. D) It is difficult to obtain enough information to accurately value such a company.

C) There is no organized market for its shares.

Over four-fifths of all U.S. business revenue is generated by which type of firms? A) partnerships C) corporations B) sole proprietorships D) limited partnerships

C) corporations

Which of the following is NOT a financial statement that every public company is required to produce? A) balance sheet B) income statement C) statement of sources and uses of cash D) statement of stockholders' equity

C) statement of sources and uses of cash

Refer to the table above. An international seafood supplier is offered 9.52 million yen today for 1000 pounds of abalone frozen in the shell. One thousand pounds of abalone can be sourced from various countries at the prices shown above. The current market exchange rates between the United States and the other relevant currencies are also shown. In addition, $1 U.S. = 102 yen. What is the value, in U.S. dollars, of the best deal the international seafood supplier can make? A) $14,333 B) $14,833 C) $13,333 D) $12,333

C. 13,333 9.52 million / 102 yen = $93,333 ; cost = 104,000/1.3 NZD = $80,000; $93,333 - $80,000 = $13,333 .

Which of the following situations is best described by the timeline shown below? A) You receive payments of $250 per month for five months. B) You receive payments of $250 per month for six months. C) You make payments of $250 per month for six months. D) You make payments of $250 per month for five months. Date (Months) 0 -$250 1 -$250 2 -$250 3 -$250 4 -$250 5 -$250 Cash Flows

C. 250 payments for 6 months

Sara wants to have $600,000 in her savings account when she retires. How much must she put in the account now, if the account pays a fixed interest rate of 8 %, to ensure that she has $600,000 in 20 years? A) $231,712 B) $180,221 C) $139,541 D) $128,729

D) $128,729. Calculate the PV with FV = $600,000 , N = 20 , and interest = 8 %, which = $128,729 . PV = FVt/(1+r)t 600,000/(1+.08)^20

Why should you approach every problem by drawing a timeline? A) A timeline can be used to schedule events which are yet to occur. B) A timeline eliminates the majority of flawed financial decisions. C) A timeline allows you to quickly sum cash flows over time. D) A timeline identifies events in a transaction or investment which might otherwise be easily overlooked.

D) A timeline identifies events in a transaction or investment which might otherwise be easily overlooked.

Which of the following is a way that the operating activity section of the statement of cash flows adjusts Net Income from the balance sheet? A) It removes the cash used for investment purposes. B) It subtracts all expenses and costs related to a firm's operating activities. C) It adds the cash that flows from investors to a firm. D) It adds all non-cash entries related to a firm's operating activities.

D) It adds all non-cash entries related to a firm's operating activities.

A printing company prints a brochure for a client and then bills them for this service. At the time the printing company's financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded? A) The sale will be added to Net Income on the income statement and retained in Net Income on the statement of cash flows. B) The sale will neither be added to Net Income on the income statement nor used to adjust Net Income on the statement of cash flows. C) The sale will not be added to Net Income on the income statement but added to Net Income on the statement of cash flows. D) The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows.

D) The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows.

What is a firm's net income? A) a measure of the firm's profitability over a given period B) the difference between the sales and other income generated by a firm, and all costs, taxes, and expenses incurred by the firm in a given period C) the last or "bottom" line of the income statement D) all of the above

D) all of the above

A corporate raider gains a controlling fraction of the shares of a poorly managed company and replaces the board of directors. How does the corporate raider hope to make a profit in this case? A) by the sale of the assets held by the company that hold most of its value B) by removing the employees expectations of the continued poor performance of the company C) by motivating the board of directors and other stakeholders in the company to make difficult short-term decisions that will increase the long-term viability of the company D) by the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors

D) by the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors

In which of the following relationships is an agency conflict problem LEAST likely to arise? A) the relationship between a hire -car company and the persons who hire that company's cars regarding the treatment of those cars B) the relationship between high-level military officers and the soldiers who serve under them regarding the willingness of the soldiery to take risks C) the relationship between a restaurateur and the suppliers of produce to that restaurant regarding the freshness of the produce supplied D) the relationship between a driver and the passengers in a car regarding the safe driving of that car

D) the relationship between a driver and the passengers in a car regarding the safe driving of that car

EPS earnings per share

Net income / # shares outstanding

A lender lends $10,100 , which is to be repaid in annual payments of $2070 for 6 years. Which of the following shows the timeline of the loan from the lender's perspective? A) B) C) D) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 - $10,100 $2070 $2070 $2070 $2070 $2070 $2070 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 0 $2070 $2070 $2070 $2070 $2070 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 - $10,100 $2070 $4070 $6070 $8070 $10,070 $12,070 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 - $10,100 $2070 $2070 $2070 $2070 $2070

Year 0 $10,100 Year 1 $2070 Year 2 $2070 Year 3 $2070 Year 4 $2070 Year 5 $2070 Year 6 $2070

Which of the following firms would be expected to have a high ROE based on that firm's high profitability? A) a brokerage firm that has high levels of leverage B) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals C) a grocery store chain that has very high turnover, selling many multiples of its assets per year D) a low-end retailer that has a low mark-up on all items it sells

a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals