Finance 350 Exam 1

Corporation

A business that is a legal entity separate from the owners, yet treated as a legal person, is called a(n):

decrease; operating

According to the statement of cash flows, an increase in interest expense will ______ the cash flow from ______ activities.

Financial Institutions

Banks and Funds

Borrowers

Corporations and Governments

concentrated ownership

Large institutional owners, shareholder activism

common-sized income statement

compute all line items as a percent of sales

Sole Proprietorship

1. Ownership: 100% owned by a single individual, owner usually manages the company, difficult to transfer ownership 4. Liability: Unlimited personal liability 5. Ability to raise capital: is difficult

market for corporate control

A corporate raider will buy up enough shares to gain control of the board and fire incompetent managers, the threat of takeover may also keep managers in line

Uses of cash

Activities of a firm that require the spending of cash

probability a firm will encounter financial distress increases.

As the degree of financial leverage increases, the:

dividend payments less net new equity raised.

Cash flow to stockholders is defined as:

Peer group analysis

Compare to similar companies or within industries; SIC and NAICS codes

Common-sized balance sheet

Compute all accounts as a percent of total assets

Capital Structure

Determining the number of shares of stock to issue is an example of a ______ decision.

Financial Markets

Equity and Bonds

.5

If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?

Net Working Capital

It is positive when the cash that will be received over the next 12 months exceeds the cash that will be paid out. Usually positive in a healthy firm

Current assets minus current liabilities.

Net working capital is defined as:

Dividends paid

On the statement of cash flows, which one of the following is considered a financing activity?

short-term solvency

Ratios that measure a firm's liquidity are known as ______ ratios.

Accounting Transparency

Sarbanes-Oxley Act

Which one of the following is an example of working capital management?

Should the firm require immediate payment from customers or offer credit terms?

Agency Relationship

Stockholders hire managers to run the company

Capital Structure

The mix of debt and equity

Last years total assets

When developing a common-size balance sheet to evaluate last year's performance, all accounts are expressed as a percentage of:

cash inflow (source of cash)

activities that bring cash in such as selling products or assets, borrowing money, or issuing securities; decrease in asset account, increase in liability or equity account

Ratios

allow for better comparison through time or between companies

Cash flows

are calculated from the firm's point of view, the sign represents the direction of cash flow; Positive: inflow, Negative: outflow

Taxes

can be very important for the decisions making process

Advantages of standardized statements

compare financial information over time, particularly as the company grows compare companies of different sizes, particularly within the same industry

In a typical corporate organization structure:

controller reports to the chief financial officer

Total Asset Turnover

is a measure of the firm's asset use efficiency -how well does it manage its assets

Equity Multiplier

is a measure of the firm's financial leverage

Profit Margin

is a measure of the firm's operating efficiency-how well it controls costs

Independent board of directors

is composed of mostly outsiders and remains independent of management

Cash Flow

is one of the most important pieces of information that a financial manager can derive from financial statements

Turnover ratios

measure how actively and efficiently the company are using its assets to generate returns

Liquidity ratios

measure how well the company can meet its short-term obligations

Income Statement

more like a video of the firms operations for a specific period of time

Liquidity

refers to the speed and ease with which an asset can be converted to cash. Is valuable to a company

Dealer Markets

the market where you have several traders carry and inventory and provide prices at which they stand ready to buy and sell the security

marginal tax rate

the percentage paid on the next dollar earned

Time-Trend Analysis

Used to see how the firm's performance is changing through time; Internal and external uses

Equity multiplier, net profit margin, and total asset turnover

Which one of the following accurately lists the three components of the DuPont identity?

Income statement

Which one of the following financial statements summarizes a firm's revenue and expenses during a period of time?

Proxy

Which one of the following grants an individual the right to vote on behalf of a shareholder?

Sale of a new share of stock from a corporation to an individual investor

Which one of the following is a primary market transaction?

Increase in common stock

Which one of the following is a source of cash for a tax-exempt firm?

Should the firm purchase a new machine for the production line?

Which one of the following questions involves a capital budgeting decision?

Some large companies are listed on Nasdaq.

Which one of the following statements concerning stock exchanges is correct?

Liquid assets are valuable to a firm.

Which one of the following statements related to liquidity is correct?

A positive cash flow to creditors represents a net cash outflow from the firm.

Which one of the following statements related to the cash flow to creditors must be correct?

A pandemic that required restaurants to limit the number customers allowed inside

You recently purchased a restaurant that had equal market and book values. The purchase included the building, fixtures, and inventory. Which one of the following would be most likely to cause the market value of the restaurant to fall below its book value?

Liqudity

a ________ asset is one that can be quickly sold without significant loss of value

Balance sheet

a snapshot of the firms assets and liabilities at a given point in time

Corporation

1. Ownership: Typical separation of owners and managers, easy transfer of ownership 2. Liability: Limited to owners initial investment 3. Ability to raise capital: The least difficult of all forms

Partnership

1. Ownership: Usually ran by two or more people 2. Liability: is unlimited 3. Ability to raise capital: is less difficult than sole proprietorship

utilizing its total assets more efficiently

Dominic's Custom Draperies has a fixed asset turnover rate of 1.13 and a total asset turnover rate of .94. Its competitor, Window Fashions, has a fixed asset turnover rate of 1.26 and a total asset turnover rate of .91. Both companies have similar operations. Based on this information, Dominic's must be _____ than Window Fashions.

average

Total income taxes divided by total taxable income equals the ______ tax rate.

Market Value

the price at which the assets, liabilities, or equity can actually be bought or sold; more important for the decision making process

average tax rate

the tax bill / taxable income

Capital Budgeting Decision

what long term investments should the firm take on Ex: What product will the firm sell? should old equipment be replaced with new equipment?

Capital Structure Decisions

where will the firm get the long term financing to pay for the investment Ex: What should the mix of equity and debt be

Working capital decisions

How to manage the everyday financial activities of the firm Ex:How many days of credit can we extend on to customers? How much inventory should we carry?

best represent the interests of the current owners of the firm.

Financial managers should strive to maximize the current value per share of the existing stock to:

Debt Security

Holder is a creditor of the firm No say in running the firm Fixed Payment Receives payment before anything is paid to equity holder If firm cannot pay, debt holders will take over ownership of firm assets limited liability

Equity Security

Holder is a owner of the firm Has say in running the firm Payment is not fixed receives what left over after all debt holders are paid If firm cannot pay debt holder, losses control of firm to debt holder limited liability

Savers

Households and Governments

Agency Problem

Managers will peruse their own private interest at the expense of the shareholder

profitability

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as ______ ratios.

operating cash flow.

The cash flow that results from a company's ongoing, normal business activities is called:

Primary Markets

The market in which securities are sold by the company public and private placement of securities, SEC registration, and underwriters

Auction Market

The market where buyers and sellers are matched with little dealer activity

Secondary Market

The market where securities have already been issued and are traded between investors , New York stock exchanged the over counter market

Finance

The process of transferring money from savers to borrowers

Financial Leverage

The use of debt; The use of this magnifies both gains and losses of shareholders

cash outflow (use of cash)

activities that involve spending cash, such as buy assets pay off debt, repurchase stock, or pay dividends ; Increase in asset account, decrease in liability or equity account