Midterm 1 Questions

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past?

Decrease in the capital intensity ratio

Which of the following are effective means of aligning management goals with shareholder interests?

I. Employee stock options II. Threat of a takeover III. Management bonuses tied to performance goals IV. Threat of a proxy fight

The T-shirt Hut successfully managed to reduce its general and administrative costs this year. This cost improvement will increase which of the following ratios?

I. Profit margin II. Return on assets IV. Return on equity

Maria is the sole proprietor of an antique store that she has operated at the same location for the past 16 years. The store rents the space in which it is located but does own all of the inventory and fixtures. The store has an outstanding loan with the local bank but no other debt obligations. There are no specific loan covenants or assets pledged as security for the loan. Due to a sudden and unexpected downturn in the economy, the store is unable to generate sufficient funds to pay the loan payments due to the bank. Which of the following options does the bank have to collect the money it is owed?

I. Sell the inventory and use the cash raised to apply to the debt II. Sell the store fixtures and use the cash raised to apply to the debt III. Take funds from Maria's personal account at the bank to pay the store's debt IV. Sell any assets Maria personally owns and apply the proceeds to the store's debt

The concept of marginal taxation is best exemplified by which one of the following?

Mitchell's Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes.

Which one of the following is a working capital decision

how much cash should the firm keep in reserve

Book value

is based on historical cost.

If a firm has a negative cash flow from assets every year for several years, the firm

may be continually increasing in size.

To calculate sustainable growth rate without using return on equity, the analyst needs the

profit margin. payout ratio. debt-to-equity ratio. asset requirement ratio.

An income statement prepared according to GAAP:

records expenses based on the matching principle.

Debt is a contractual obligation that

requires a repayment of a stated amount and interest over the period. & allows the bondholders to sue the firm if it defaults.

Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are known as _____ ratios.

short-term solvency

Free cash flow is

cash that the firm is free to distribute to creditors and stockholders

A _____ standardizes items on the income statement and balance sheet as a percentage of total sales and total assets, respectively.

common-size statement

Which one of the following is a capital budgeting decision

deciding whether or not to open a new store

The main objective of long-term financial planning models is to

determine the asset requirements given the investment activities of the firm. plan for contingencies or uncertain events. determine the external financing needs.

working capital management includes which one of the following

determining which customers will be granted credit

which of the following is a capital structure decision

establishing the preferred debt-equity level

One key reason a long-term financial plan is developed is because

there are direct connections between achievable corporate growth and the financial policy.

the daily financial operations of a firm are primarily controlled by managing the

working capital

Which one of the following statements concerning liquidity is correct?

Balance sheet accounts are listed in order of decreasing liquidity.

Which one of the following will decrease the liquidity level of a firm?

Cash purchase of inventory

Which one of the following is most apt to align management's priorities with shareholders' interests?

Compensating managers with shares of stock that must be held for three years before the shares can be sold

An increase in which one of the following will increase operating cash flow for a profitable, tax paying firm?

Depreciation

Which one of the following is a capital structure decision?

Establishing the preferred debt-equity level

Which of the following are advantages of the corporate form of organization?

I. Ability to raise large sums of equity capital II. Ease of ownership transfer III. Profits taxed at the corporate level IV. Limited liability for all owners

Martha's Sweet Shop reduced its fixed assets this year without affecting the shop's operations, sales, or equity. This reduction will increase which of the following ratios?

II. Return on assets III. Total asset turnover

Which one of the following relates to a negative change in net working capital?

Increase in current liabilities with no change in current assets for the period

Which one of the following best matches the primary goal of financial management?

Increasing the market value of the firm

Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period?

Positive cash flow from assets

New Century Products is a company that was founded last year. While the outlook for the company is positive, it currently has negative earnings. If you wanted to measure the progress of this firm, which one of the following ratios would probably be best to monitor given the firm's current situation?

Price-sales ratio

Which one of the following situations is most apt to create an agency conflict?

Rejecting a profitable project to protect employee jobs

Terry invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested?

Terry could have the same future value and invest less than $2,000 initially if he could earn more than 6.5 percent interest.

Sixty years ago, your grandparents opened two savings accounts and deposited $200 in each account. The first account was with City Bank at 3 percent, compounded annually. The second account was with Country Bank at 3.5 percent, compounded annually. Which one of the following statements is true concerning these accounts?

The Country Bank account has paid $397.30 more in interest than the City Bank account.

Growth can be reconciled with the goal of maximizing firm value

because growth must be an outcome of decisions that maximize NPV.

Cash flow to creditors is equal to

beginning long-term debt minus ending long-term debt plus interest paid.