FIN701 - Module 1-2

As the degree of financial leverage increases, the:

A) probability a firm will encounter financial distress increases. NOT: B) amount of a firm's total debt decreases. C) less debt a firm has per dollar of total assets. D) number of outstanding shares of stock increases. E) accounts payable balance decreases.

Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value?

B) Good reputation of the company NOT: A) Real estate investment C) Equipment owned by the firm D) Money due from a customer E) An item held by the firm for future sale

The book value of a firm is:

B) based on historical cost. NOT: A) equivalent to the firm's market value provided that the firm has some fixed assets. C) generally greater than the market value when fixed assets are included. D) more of a financial than an accounting valuation. E) adjusted to the market value whenever the market value exceeds the stated ·book value.

Which one of the following accounts is the most liquid?

C) Accounts Receivable NOT: A) Inventory B) Building D) Equipment E) Land

Which one of the following is a current asset?

C) Accounts receivable NOT: A) Account~ payable B) Trademark D) Notes payable E) Equipment

Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?

C) Balance sheet NOT: A) Income statement B) Creditor's statement D) Statement of cash flows E) Dividend statement

Which one of the following will increase the cash flow from assets, all else equal?

C) Decrease in the change in net working capital NOT: A) Decrease in cash flow to stockholders B) Decrease in operating cash flow D) Decrease in cash flow to creditors E) Increase in net capital spending

Galaxy Interiors income statement shows depreciation of $ 1,611 , sales of $21,415, interest paid of $1,282, net income of$1,374, and costs of goods sold of $16,408. What is the amount of the noncash expenses?

D )$1 ,6 11 Noncash expenses= Depreciation = $I ,6 I I NOT: A) $2,893 B) $ 1,282 C) $740 E) $2,351

Which one of the following represents the most liquid asset?

D) $100 of inventory that is sold today for $100 cash NOT: A) $100 account receivable that is discounted and collected for $96 today B) $100 of inventory that is sold today on credit for $103 C) $100 of inventory that is discounted and sold for $97 cash today E) $ 100 of accounts receivable that will be collected in full next week

You recently purchased a grocery store. At the time of the purchase, the store's market value and its book value were equal. The purchase included the building, fixtures, and inventory. Which one of the following is most apt to cause the market value of this store to be less than its book value?

D) Construction of a new restricted access highway located between the store and the surrounding residential areas NOT: A) A sudden and unexpected increase in inflation B) The replacement of old inventory items with more desirable products C) Improvements to the surrounding area by other store owners E) Addition of a stop light at the main entrance to the store's parking lot

Which one of the following statements concerning net working capital is correct?

D) Net working capital may be a negative value. NOT: A) Net working capital increases when inventory is purchased with cash. B) Net working capital excludes inventory. C) Total assets must increase if net working capital increases. E) Net working capital is the amount of cash a firm currently has available for spending.

The cash flow that is available for distribution to a corporation's creditors and stockholders is called the:

D) cash flow from assets. NOT: A) operating cash flow. B) net capital spending. C) net working capital. E) cash flow to stockholders.

Noncash items refer to:

D) expenses that do not directly affect cash flows. NOT: A) fixed expenses. B) inventory items purchased using credit. C) the ownership of intangible assets such as patents. E) sales that are made using store credit.

Cash flow from assets is also known as the firm's:

D) free cash flow. NOT: A) capital structure. B) equity structure. C) hidden cash flow. E) historical cash flow.

The cash flow related to interest payments less any net new borrowing is called the:

E) cash flow to creditors. NOT: A) operating cash flow. B) capital spending cash flow. C) net working capital. D) cash flow from assets.

Net working capital is defined as:

E) current assets minus current liabilities. NOT: 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.

Shareholders' equity:

E) represents the residual value of a firm. NOT: A) is referred to as a firm's financial leverage. B) is equal to total assets plus total liabilities. C) decreases whenever new shares of stock are issued. D) includes patents, preferred stock, and common stock.

Describe the different ways in which capital can be transferred from suppliers of capital to those who are demanding capital.

In a well-functioning economy, capital will flow efficiently from those who supply capital to those who demand it. This transfer of capital can take place in three different ways: I. Direct transfers of money and securities occur when a business sells its stocks or bonds directly to savers, without going through any type of financial institution. The business delivers its securities to savers, who, in turn, give the firm the money it needs. 2. Transfers may also go through an investment bank that underwrites the issue. An underwriter serves as a middleman and facilitates the issuance of securities. The company sells its stocks or bonds to the investment bank, which then sells these same securities to savers. The businesses' securities and the savers' money merely "pass through" the investment bank. 3. Transfers can also be made through a financial intermediary. Here the intermediary obtains funds from savers in exchange for its own securities. The intermediary uses this money to buy and hold businesses' securities, while the savers hold the intermediary's securities. Intermediaries literally create new forms of capital. The existence of intermediaries greatly increases the efficiency of money and capital markets.

What does liquidity measure? Explain the trade-off a firm faces between high liquidity and low liquidity levels.

Liquidity measures how quickly and easily an asset can be converted to cash without significant loss in value. It's desirable for firms to have high liquidity so that they have a large factor of safety in meeting short-term creditor demands. However, since liquidity also has an opportunity cost associated with it-namely that higher returns can generally be found by investing the cash into productive assets-low liquidity levels are also desirable to the firm. It's up to the firm's financial management staff to find a reasonable compromise between these opposing needs.