Financial Management Exam 1

You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 9 percent interest. Approximately how long must you wait for your investment to double in value?

8 years

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

Net working capital decreases when:

a dividend is paid to current shareholders.

Highly liquid assets:

can be sold quickly at close to full value.

Lester had $6,270 in his savings account at the beginning of this year. This amount includes both the $6,000 he originally invested at the beginning of last year plus the $270 he earned in interest last year. This year, Lester earned a total of $282.15 in interest even though the interest rate on the account remained constant. This $282.15 is best described as:

compound interest.

The matching principle states that:

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

Net working capital is defined as:

current assets minus current liabilities.

All else held constant, the book value of owners' equity will decrease when:

dividends exceed net income for a period.

Cash flow to stockholders is defined as:

dividends paid minus net new equity raised.

Net capital spending is equal to:

ending net fixed assets minus beginning net fixed assets plus depreciation.

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 common-size balance sheet helps financial managers determine:

if changes are occurring in a firm's mix of assets.

The future value of a lump-sum investment will increase if you:

increase the time period.

Jamie earned $14 in interest on her savings account last year. She has decided to leave the $14 in her account so that she can earn interest on the $14 this year. The interest earned on last year's interest earnings is called:

interest on interest.

Cash flow to creditors is defined as:

interest paid minus net new borrowing.

A firm's liquidity level decreases when:

inventory is purchased with cash.

The tax rate that determines the amount of tax that will be due on the next dollar of taxable income earned is called the:

marginal tax rate.

The primary goal of financial management is most associated with increasing the:

market value of the firm.

The equity multiplier is equal to:

one plus the debt-equity ratio.

By definition, a bank that pays simple interest on a savings account will pay interest:

only on the principal amount originally invested.

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

Average tax rate

Which one of the following situations is most apt to create an agency conflict?

Basing management bonuses on the length of employment

Which one of the following is a measure of long-term solvency?

Cash coverage ratio

Kendall is investing $3,333 today at 3 percent annual interest for three years. Which one of the following will increase the future value of that amount?

Increasing the interest rate

Katlyn needs to invest $5,318 today for her savings account to be worth $8,000 six years from now. Which one of the following terms refers to the $5,318?

Present value

Leon is the owner of a corner store. Which ratio should he compute if he wants to know how long the store can pay its bills given its current level of cash and accounts receivable? Assume all receivables are collectible when due.

Quick ratio

If a firm has an inventory turnover of 15, the firm:

sells its entire inventory an average of 15 times each year.

Shareholders' equity is best defined as:

the residual value of a firm.