Finance Practice Exam

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

The market value of a firm's fixed assets:

is equal to the estimated current cash value of those assets.

Stadford, Inc. is financed with 40 percent debt and 60 percent equity. This mixture of debt and equity is referred to as the firm's:

capital structure.

Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital:

had to decrease.

A firm has a current ratio of 1.4 and a quick ratio of 0.9. Given this, you know for certain that the firm:

has positive net working capital.

The matching principle states that:

the costs of producing an item should be recorded when the sale of that item is recorded as revenue.

The Embroidery Shoppe had beginning retained earnings of $18,670. During the year, the company reported sales of $83,490, costs of $68,407, depreciation of $8,200, dividends of $950, and interest paid of $478. The tax rate is 35 percent. What is the retained earnings balance at the end of the year?

$21,883.25 Net income = ($83,490 - $68,407 - $8,200 - $478) × (1 - 0.35) = $4,163.25; Ending retained earnings = $18,670 + $4,163.25 - $950 = $21,883.25

Martha's Fabric House has sales of $137,200, total equity of $74,400, and a debt-equity ratio of 0.45. What is the capital intensity ratio?

0.79 Total assets = (0.45 × $74,400) + $74,400 = $107,880; Capital intensity ratio = $107,880/$137,200 = 0.79

. Which one of the following terms is defined as the total tax paid divided by the total taxable income?

Average tax rate

. Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?

Common-size income statement

Todd and Cathy created a firm that is a separate legal entity and will share ownership of that firm on a 50-50 basis. Which type of entity did they create if they have no personal liability for the firm's debts?

Corporation

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

The DuPont identity can be totally defined by which one of the following?

Equity multiplier and return on assets

Jamie is employed as a commercial loan officer for a regional bank centered in the midwestern section of the U.S. Her job falls into which one of the following areas of finance?

Financial institutions

Which one of the following is a working capital decision?

How much cash should the firm keep in reserve?

Which of the following are determinants of a firm's sustainable rate of growth?

I. Amount of sales generated from each dollar invested in assets II. Amount of debt per dollar of equity IV. Percentage of net income distributed as dividends

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 debtII. Sell the store fixtures and use the cash raised to apply to the debtIII. Take funds from Maria's personal account at the bank to pay the store's debtIV. Sell any assets Maria personally owns and apply the proceeds to the store's debt

Which one of the following is included in the market value of a firm but not in the book value?

Reputation of the firm

. Which one of the following is most apt to create a situation where an agency conflict could arise?

Separating management from ownership

The cash coverage ratio is used to evaluate the:

ability of a firm to pay the interest on its debt.