Corporate finance practice exam 1

Cash flow from assets

Cash flow from assets = cash flow to creditors + cash flow to stockholders

Efficient financial markets fluctuate continuously because: A. the markets are continually reacting to old information as that information is absorbed.' B. the markets are continually reacting to new information. C. arbitrage trading is limited. D. current trading systems require human intervention. E. investments produce varying levels of net present values

The markets are continually reacting to new information.

Profit Margin

net income / Sales

Which one of the following is a use of cash? A. increase in notes payable B. decrease in inventory C. increase in long-term debt D. decrease in accounts receivables E. decrease in common stock

decrease in common stock

A firm has common stock of $6,200, paid-in surplus of $9,100, total liabilities of $8,400, current assets of $5,900, and fixed assets of $21,200. What is the amount of the shareholders' equity?

$18,700(Shareholders' equity = $5,900 + $21,200 - $8,400 = $18,700(Note: The amount of retained earnings is not provided, so you must use total assets minus total liabilities to derive the correct answer.)

Equity Multiplier

=Total Assets/ Equity

The _____ tax rate is equal to total taxes divided by total taxable income. A. deductible B. residual C. total D. average E. marginal

average

Which one of the following terms is defined as the mixture of a firm's debt and equity financing? A. working capital management B. cash management C. cost analysis D. capital budgeting E. capital structure

capital structure

The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called the: A. operating cash flow. B. net capital spending. C. net working capital. D. cash flow from assets. E. cash flow to stockholders.

cash flow from assets.

The sources and uses of cash over a stated period of time are reflected on the: A. income statement. B. balance sheet. C. tax reconciliation statement. D. statement of cash flows. E. statement of operating position

statement of cash flows.

On a common-size balance sheet all accounts are expressed as a percentage of: A. sales for the period. B. the base year sales. C. total equity for the base year. D. total assets for the current year. E. total assets for the base year.

total assets for the current year.

Market Capitalization

=Price per share * Shares Outstanding

Operating Cash Flow

= EBIT + Dep - Taxes

Market to Book Ratio

= Market Price / Book Price

EPS

= Net Income/Shs Outstanding

ROE

= Net income / total equity

P/E

= Price per share/ EPS

ROE

= ROA * Equity Multiplier

Du Pont Identity

= ROE = PM * Total Asset Turnover * Equity Multiplier

Total Asset Turnover

= Sales / Total Assets

ROA

= net income / total assets

Russell's Deli has cash of $136, accounts receivable of $87, accounts payable of $215, and inventory of $409. What is the value of the quick ratio? A. 0.31 B. 0.53 C. 0.71 D. 1.04 E. 1.07

1.04 Quick ratio = ($136 + $87)/$215 = 1.04

What is the return on equity for 2009? (Use 2009 values) A. 15.29 percent B. 16.46 percent C. 17.38 percent D. 18.02 percent E. 18.12 percent

18.02 percent

he most acceptable method of evaluating the financial statements of a firm is to compare the firm's current: A. financial ratios to the firm's historical ratios. B. financial statements to the financial statements of similar firms operating in other C. countries. D. financial ratios to the average ratios of all firms located within the same geographic area. E. financial statements to those of larger firms in unrelated industries. F. financial statements to the projections that were created based on Tobin's Q.

Financial ratios to the firm's historical ratios.

Big Guy Subs has net income of $150,980, a price-earnings ratio of 12.8, and earnings per share of $0.87. How many shares of stock are outstanding? A. 13,558 B. 14,407 C. 165,523 D. 171,000 E. 173,540

Number of shares = $150,980/$0.87 = 173,540

The excess return is computed as the: A. return on a security minus the inflation rate. B. return on a risky security minus the risk-free rate. C. risk premium on a risky security minus the risk-free rate. D. the risk-free rate plus the inflation rate. E. risk-free rate minus the inflation rate.

return on a risky security minus the risk-free rate.

Shareholders probably have the most interest in which one of the following sets of ratios? A. return on assets and profit margin B. long-term debt and times interest earned C. price-earnings and debt-equity D. market-to-book and times interest earned E. return on equity and price-earnings

return on equity and price-earnings

Jensen Enterprises paid $1,300 in dividends and $920 in interest this past year. Common stock increased by $1,200 and retained earnings decreased by $310. What is the net income for the year?

B. $990 (Net income = $1,300 + (-$310) = $990)

Which one of the following statements is correct? A. A general partnership is legally the same as a corporation. B. Both sole proprietorship and partnership income is taxed as individual income. C. Partnerships are the most complicated type of business to form. D. All business organizations have bylaws. E. Only firms organized as sole proprietorships have limited lives.

Both sole proprietorship and partnership income is taxed as individual income.

One year ago, you purchased a stock at a price of $32.16. The stock pays quarterly dividends of $0.20 per share. Today, the stock is selling for $28.20 per share. What is your capital gain on this investment? A. -$4.16B. -$3.96C. -$3.76D. -$3.16E. -$2.96

Capital gain = $28.20 - $32.16 = -$3.96

Six months ago, you purchased 100 shares of stock in Global Trading at a price of $38.70 a share. The stock pays a quarterly dividend of $0.15 a share. Today, you sold all of your shares for $40.10 per share. What is the total amount of your dividend income on this investment? A. $15B. $30C. $45D. $50E. $60

Dividend income = ($0.15 2) 100 = $30

Which of the following are included in the market value of a firm but are excluded from the firm's book value? I. value of management skills II.value of a copyright III. value of the firm's reputation IV. value of employee's experience

I, III, and IV only

Net working capital is defined as: A. total liabilities minus shareholders' equity. B. current liabilities minus shareholders' equity. C. fixed assets minus long-term liabilities. D. total assets minus total liabilities. E. current assets minus current liabilities.

current assets minus current liabilities.

A firm has $520 in inventory, $1,860 in fixed assets, $190 in accounts receivables, $210 in accounts payable, and $70 in cash. What is the amount of the current assets?

$780(Current assets = $520 + $190 + $70 = $780)

A stock has annual returns of 13 percent, 21 percent, -12 percent, 7 percent, and -6 percent for the past five years. The arithmetic average of these returns is _____ percent while the geometric average return for the period is _____ percent. A. 3.89; 3.62B. 3.89; 4.60C. 3.62; 3.89D. 4.60; 3.62E. 4.60; 3.89

Arithmetic average = (0.13 + 0.21- 0.12 + 0.07 - 0.06)/5 = 4.60 percent Geometric return = (1.13 1.21 0.88 1.07 0.94).20 - 1 = 3.89 percent

firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of $126,400, a price-earnings ratio of 18.7, and a book value per share of $9.12. What is the market-to-book ratio? A. 1.62 B. 1.84 C. 2.23 D. 2.45 E. 2.57

Earnings per share = $126,400/160,000 = $0.79Price per share = $0.79 x 18.7 = $14.773Market-to-book ratio = $14.773/$9.12 = 1.62

Taylor's Men's Wear has a debt-equity ratio of 42 percent, sales of $749,000, net income of $41,300, and total debt of $198,400. What is the return on equity? A. 7.79 percent B. 8.41 percent C. 8.74 percent D. 9.09 percent E. 9.16 percent

Return on equity = $41,300/($198,400/0.42) = 8.74 percent

Your firm has total assets of $4,900, fixed assets of $3,200, long-term debt of $2,900, and short-term debt of $1,400. What is the amount of net working capital?

$300(Net working capital = $4,900 - $3,200 - $1,400 = $300)

Which one of the following is a capital budgeting decision? A. determining how many shares of stock to issue B. deciding whether or not to purchase a new machine for the production line C. deciding how to refinance a debt issue that is maturing D. determining how much inventory to keep on hand E. determining how much money should be kept in the checking account

deciding whether or not to purchase a new machine for the production line

Cash flow to stockholders is defined as: A. the total amount of interest and dividends paid during the past year. B. the change in total equity over the past year. C. cash flow from assets plus the cash flow to creditors. D. operating cash flow minus the cash flow to creditors. E. dividend payments less net new equity raised.

dividend payments less net new equity raised.

If a firm produces a twelve percent return on assets and also a twelve percent return on equity, then the firm: A. may have short-term, but not long-term debt. B. is using its assets as efficiently as possible. C. has no net working capital. D. has a debt-equity ratio of 1.0. E. has an equity multiplier of 1.0.

has an equity multiplier of 1.0.

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? A. income statement B. balance sheet C. statement of cash flows D. tax reconciliation statement E. market value report

income statement

Which one of the following is a source of cash? A. increase in accounts receivable B. decrease in notes payable C. decrease in common stock D. increase in accounts payable E. increase in inventory

increase in accounts payable

What is the impact to ROE if debt is increased

it may increase ROE-but be aware that increasing debt also increases interest expense which will reduce profit margin - which acts to reduce ROE

Ratios that measure a firm's financial leverage are known as _____ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. book value

long-term solvency

Decisions made by financial managers should primarily focus on increasing which one of the following? A. size of the firm B. growth rate of the firm C. gross profit per unit produced D. market value per share of outstanding stock E. total sales

market value per share of outstanding stock

Which one of the following best states the primary goal of financial management? A. maximize current dividends per share B. maximize the current value per share C. increase cash flow and avoid financial distress D. minimize operational costs while maximizing firm efficiency E. maintain steady growth while increasing current profits

maximize the current value per share

Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B. The stock is listed on the NYSE. This trade occurred in which one of the following? A. primary, dealer market B. secondary, dealer market C. primary, auction market D. secondary, auction market E. secondary, OTC market

secondary, auction market

Which one of the following will increase the value of a firm's net working capital? A. using cash to pay a supplier B. depreciating an asset C. collecting an accounts receivable D. purchasing inventory on credit E. selling inventory at a profit

selling inventory at a profit

A firm has net working capital of $640. Long-term debt is $4,180, total assets are $6,230, and fixed assets are $3,910. What is the amount of the total liabilities?

$5,860(Current assets = $6,230 - $3,910 = $2,320Current liabilities = $2,320 - $640 = $1,680Total liabilities = $1,680 + $4,180 = $5,860)

29. Which one of the following statements is correct? A. Book values should always be given precedence over market values. B. Financial statements are frequently used as the basis for performance evaluations. C. Historical information provides no value to someone who is predicting future performance. D. Potential lenders place little value on financial statement information. E. Reviewing financial information over time has very limited value.

Financial statements are frequently used as the basis for performance evaluations.

A firm has a debt-equity ratio of 0.42. What is the total debt ratio? A. 0.30 B. 0.36 C. 0.44 D. 1.58 E. 2.38

The debt-equity ratio is 0.42. If total debt is $42 and total equity is $100, then total assets are $142. Total debt ratio = $42/$142 = 0.30.

Which one of the following accounts is the most liquid? A. inventory B. building C. accounts receivable D. equipment E. land

accounts receivable

Du Pont Identity shows that ROE is affected by 3 things

1. Operating Efficiency as measured by Profit Margin 2. Asset use efficiency as measured by total asset turnover 3. Financial leverage as measured by equity multiplier

The decision to issue additional shares of stock is an example of which one of the following? A. working capital management B. net working capital decision C. capital budgeting D. controller's duties E. capital structure decision

capital structure decision

Which one of the following business types is best suited to raising large amounts of capital? A. sole proprietorship B. limited liability company C. corporation D. general partnership E. limited partnership

corporation