FIN303 Exam 1

Which of the following are key questions for investments?

What is the best mixture of financial assets to hold? What are the risks and rewards associated with investing? What determines the price of a financial asset?

A common-size balance sheet expresses accounts as a percentage of ______

total assets

Corporations in other countries are often called:

joint stock companies limited liability companies public limited companies

Cash Coverage Ratio

(EBIT + Depreciation)/Interest Expense

Total Debt Ratio Formula

(Total Assets - Total Equity) / Total Assets

The market value of an item is:

the cash value you'd get if you sold it.

For a given time period (t) and interest rate (r), the present value factor is ______ the future value factor.

the reciprocal of 1 divided by

According to the current U.S. corporate tax code, the corporate tax rate in effect for 2021 is ______ percent.

21

True or false: Given the PV, FV, and life of the investment, you can determine the discount rate.

true

Partnership Disadvantages

unlimited liability difficult to transfer ownership

profit margin

Net Income/Sales

Return on Equity Ratio

Net Income/Stockholders Equity

Return on Assets (ROA)

Net Income/Total Assets

Total Asset Turnover Ratio

Sales/Total Assets

What does it mean when a firm has a days' sales in receivables of 45?

The firm collects its credit sales in 45 days on average.

Why is a dollar received today worth more than a dollar received in the future?

Today's dollar can be reinvested, yielding a greater amount in the future.

To calculate the future value of $100 invested for t years at r interest rate, you enter the present value in your calculator as a negative number. Why?

because the $100 is an outflow from you which should be negative

A problem with the TIE ratio is that it is based on EBIT, which is not a measure of ________ available to pay interest.

cash

Future value is the ____ value of an investment at some time in the future.

cash

The federal government taxes which of the following?

corporate earning and shareholder dividends

5 areas of finance

corporate finance investments financial institutions international finance fintech

Inventory Turnover Ratio

cost of goods sold/average inventory

Current Ratio Equation

current assets - current liabilities

New Working Capital equation

current assets - current liabilities

Liabilities can be classified as:

current or long-term

Calculating the present value of a future cash flow to determine its worth today is commonly called ______ valuation

discounted cash flow (DCF)

Cash flow to stockholders

dividends paid out by a firm - net new equity raised

Capital Spending equation

ending net fixed assets - beginning net fixed assets + depreciation

corporate scandals

enron tycon worldcom adelphia

Financial statement analysis is primarily "management by _____ ."

exception

One of the important questions in the area of investments includes the potential risks and reward associated with investing in ___ assets.

financial

financial ratios are developed from a firm's...

financial information

simple interest

interest paid on the principal alone

The times interest earned ratio is a measure of _________-

long-term solvency

When dealing with compound interest, it is more financially advantageous to have a ______ time horizon for investment.

longer

Given an investment amount and a set rate of interest, the ______ the time horizon the ______ the future value.

longer; greater

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

market value

Market to Book Ratio

market value per share/book value per share

A firm may use a price-sales ratio when it has had ______ earnings over the past year.

negative

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?

noncash expenses

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

pay everyday cash outflows.

______ group analysis is a way to establish a benchmark when using ratios.

peer

One of the most important uses of financial statement information within the firm is:

performance evaluation

With discounting, the resulting value is called the ______ value, while with compounding the result is called the ______ value. Multiple choice question.

present; future

Price Earnings Ratio

price per share/earnings per share

Receivables Turnover Ratio

sales / accounts receivable

______ financial statements enable one to compare firms that differ in size.

standardized

Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent, while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its ______.

liquidity

According to GAAP, when is income reported?

when it is earned or accrued

Investments

work with financial assets (stock and bonds) value of financial assets, risk v. return, and asset allocation

Ensuring that the firm has sufficient funds to continue operations on a day-to-day basis comes under the heading of ______ management.

working capital

Financial Institutions

companies that specialize in financial matter

Under GAAP, assets are generally carried on a firm's balance sheet at Blank______

historical cost, book value

Short-term solvency ratios are also called ______ ratios.

liquidity

Costs incurred during a particular time period that might be reported as selling, general, and administrative expenses are also known as ________.

period costs

In practice, accountants tend to classify costs as either ______ costs or ______ costs.

product; period

Liquidity has two dimensions which are the ability to:

quickly convert assets into cash without significant loss in value.

capital budgeting

the process of planning and managing a firm's long-term investments

careers in financial institutions

insurance broker, risk management, commercial loan officer

cash ratio formula

Cash / Current Liabilities

The three most important items to keep in mind when reviewing an income statement are:

GAAP, cash versus noncash items, and time and costs

What questions can be answered by reviewing a firm's balance sheet?

How much debt is used to finance the firm? What is the total amount of assets the firm owns?

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.

True or false: The current ratio will decrease if current assets increase, while everything else remains unchanged.

True

three primary questions that financial managers face:

What long-term investments should be taken on? How will we pay for these investments? How will we manage the day-to-day cash flow needs?

A customer has yet to pay the bill for products purchased from Firm A on credit. This customer's trade credit is recorded in which of Firm A's balance sheet accounts?

accounts receivable

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

auction market

ex of financial institutions

banks, credit unions, insurance companies

international finance

covers the international implications of all things finance including financial institutions, corporate finance, and investments

The more debt a firm has, the greater its:

degree of financial leverage

One of the important questions in the area of investments includes the potential risks and reward associated with investing in ______ assets.

financial

traditional financial ratio categories

financial leverage ratios profitability ratios turnover ratios

goal of capital budgeting

find investment opportunities that are worth more to the firm than they cost

Common-size statements are best used for comparing:

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

Depreciation is the accountant's estimate of the cost of _____ used in the production process matched with the benefits produced from owning it.

fixed assets, equipment

A partnership in which partners share in gains or losses and carry unlimited liability for all partnership debts is called a :

general partnership

The purpose of a(n) ______ is to measure performance over a set period of time

income statement

Marginal tax rates are the most important tax rates because:

incremental cash flows are taxed at marginal tax rates. financial decisions are usually based on new cash flows.

Which of the following are defining features of the primary market?

it is the market where initial public offerings are made. Proceeds from the sale of securities go to the issuing firm.

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

Corporation Advantages

limited liability unlimited life separation of ownership and management transfer of ownership is easy easier to raise capital

working capital management

managing current assets and current liabilities (working capital)

For financial decision-making purposes, the most important tax rate is the ______ tax rate.

marginal

What should be the goal of a corporation?

maximize the current value per share of the company's existing stock maximize the market value of the existing owners' equity

goal of capital structure

maximize the return on debt and equity investments

Operating cash flow is a sign of trouble if...

negative over a long period of time

treasurer

oversees cash management, capital expenditures, and financial planning

controller

oversees taxes, cost accounting, financial accounting, and data processing

Sole Proprietorship Disadvantages

owner has unlimited liability limited to life of owner difficult to sell ownership

where does cash generated by a corporation typically go?

paid to shareholders and creditors reinvested in the firm to pay corporate taxes

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

secondary

Corporation Disadvantages

separation of ownership and management double taxation

The owners of a corporation are called ______.

shareholders

Who is entitled to the residual value of a firm's cash flows?

shareholders

Sole Proprietorship Advantages

simplest business to form with least regulation owners keep all profits taxed once

intention of SOX

strengthen protection against accounting fraud and financial malpractice

operating cash flow

tells us whether or not a firm's cash inflows from its operations are sufficient to cover its everyday cash outflows

capital structure

the mixture of debt and equity maintained by a firm

The officer responsible for managing the firm's cash flows is the ______.

treasurer

What three subjects is the financial manager concerned with?

working capital management capital budgeting capital structure

present value factor?

1 / (1 + r)^t

Long-term liabilities represent obligations of the firm lasting more than ____

1 year

three components of cash flow from assets

1. capital spending 2. change in net working capital 3. operating cash flow

Rank the ease (from easiest to hardest) of turning the following assets into cash

1. cash equivalents 2. accounts receivable 3. inventory 4. plant and equipment

Current assets are defined as assets that can be turned into cash within ______ months.

12

In large firms, financial activity is usually associated with which top officer?

CFO

Careers in Corporate Finance

CFO, CEO, Controller, Treasurer, Financial Manager

Compounding Interest

Earning interest on interest

single-period formula for future value

FV = PV × (1 + r)

multi-period formula for compounding a present value into a future value

FV = PV × (1 + r)^t

single-period present value formula

PV = FV/(1 + r)

Present Value Formula

PV=FV/(1+r)^t

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

a long time

What does shareholders' equity represent?

a residual claim against the firm's total assets

What is depreciation?

a systemic expensing of an asset based on the asset's estimated life

Tax rates for proprietorships, partnerships, and LLCs ______ with the passage of the Tax Cuts and Jobs Act of 2017.

changed

financial ratios are used for ______ purposes

comparison

SOX disadvantages

compliance very costly go public outside US go dark inside US

Goal of working capital management

ensure the firms has sufficient resources to continue operations on a daily basis

how to capital budget

evaluate size, timing, and risk of future cash flows

how to: capital structure

evaluate size, timing, and risk of future cash flows

how to: working capital management

evaluate size, timing, and risk of future cash flows

True or false: Financial ratios are computed using only balance sheet information.

false

True or false: Blue Company and Red Company have equal levels of current assets and current liabilities. Blue Company has higher inventory levels than Red Company. Blue Company is more liquid than Red Company.

false; Higher levels of inventory result in less liquidity, all else equal.

True or false: If a company has inventory, the quick ratio will always be greater than the current ratio. why?

false; If a company has inventory, the quick ratio will always be less than the current ratio.

An organization must prepare ______ and bylaws when forming a corporation. Multiple choice question.

articles of incorporation

True or false: The Sarbanes-Oxley Act provides incentives for companies to go public in U.S. markets.

False

why do financial managers use a common-size income statement?

The common-size income statement can show sources of cash for the company.

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

less than

Partnership Advantages

relatively easy to start more capital than sole proprietorship taxed once

In a common-size income statement, each item is expressed as a percentage of total ....

sales

careers in investments

stockbroker, financial advisor, portfolio manager, security analyst

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

stocks and bonds