financial management quiz 1

11. The Proctor and Gamble Company (NYSE ticker: PG) share price in the market today was $121.4100. It has 2.5000 billion shares outstanding. It has $4.2390 billion in cash, and its total debt is $23.3710 billion. The value of this firm is: a.$121.4100 billion b.$284.3930 billion c.$303.5250 billion d.$322.6570 billion e. none

$322.6570 billion = 2.5*121.4100 + 23.3710 - 4.2390 = $322.6570 billion

20. A firm has total debt of $1,200 million and a debt/equity ratio of 0.30. Its total assets equal: a. $1,560 b. $3,000 c. $ 3,600 d. $5,200 e. $6,700

D = $1200. D/E = 0.30 🡺 E = 1200/0.30 = $4000. Total assets= D + E = 1200+4000 = $5,200. This is a question directly from the HW/Slides

8. Which of the following statements about the current ratio for a firm are true: a. Current ratio values more than 1 are considered good Implies current assets more than current liabilities and firm can cover short term bills b. Both lower or higher values of the current ratio are considered good c. Current ratio values less than 0 are considered good d. Current ratio values between 0 and 1 are considered good e. Current ratio does not tell us anything about the firm

a. Current ratio values more than 1 are considered good Implies current assets more than current liabilities and firm can cover short term bills

17. Last year GS's fixed assets declined by $24.80 million (net of depreciation) and its liabilities increased by $0.96 million. Assuming all else same, GS's cash flows will: a. Increase in cash flow of $25.76 million b. Decrease in cash flow of $25.76 million c. Will remain the same d. Decrease by $23.84 million e. Increase by $23.84 million

a. Increase in cash flow of $25.76 million = +24.80+0.96 = $25.76 million. Company sold assets and borrowed money both of which will increase cash flows

As compared to sole proprietorships and partnerships, in corporations it is easy to lose sight of the fact that a manager's job is to maximise firm value because of: a. Separation of ownership and control b. Corporations are double taxed c. Corporations have unlimited life and manager memory is limited d. Owners are not liability for any obligations of the firm e. The corporation has almost the same rights as people

a. Separation of ownership and control Conceptual: See slides for Topic 2. Since there is no direct, day to day oversight of managers, they can get sidetracked and act in their own self interest than in the interest of shareholders

2. Capital budgeting refers to: a. The process of planning and managing the firm's long-term investments b. Deciding how to raise money for the firm c. Ensuring you have enough money budgeted for next year's expenses d. Ensuring you have enough money budgeted for employee salaries e. None of the above

a. The process of planning and managing the firm's long-term investments Conceptual: See slides for Topic 1

19. Growth firms are those firms for whom: a. The ratio of market to book value is high b. The ratio of market to book value is low c. The ratio of market to book value is 1 d. The ratio of market to book value is 0 e. The ratio of market to book value cannot be computed

a. The ratio of market to book value is high Conceptual: See slides for Topic 3 and our class discussion regarding market to book ratios

A firm operating a very risky business will tend to: a. Use more of their own money than borrowings b. Use more of borrowings than their own money c. Use money obtained from a bank d. Use an equal amount of their own money and borrowings e. None of the above

a. Use more of their own money than borrowings Conceptual: See slides for Topic 1. Investors are reluctant to lend to firms in new businesses or those with less stable incomes or in risky businesses

3. Which one of the following is an example of a capital budgeting decision: a. Determining how much debt should be borrowed from a particular lender b. Deciding whether or not to open a new store c. Deciding when to repay a long-term debt d. Determining how much inventory to keep on hand e. Determining how much money should be kept in the checking account

b. Deciding whether or not to open a new store Conceptual: See slides for Topic 1

9. Which of the following is the reason why most firms incorporate in Delaware: a. A firm incorporated in Delaware does not pay any taxes b. Delaware courts can resolve disputes quickly via trials with no juries c. Delaware has strict disclosure laws and this increases firm value d. Delaware places limits on the liability of corporations e. Delaware is close to NYC a major business center in the U.S.

b. Delaware courts can resolve disputes quickly via trials with no juries Conceptual: See slides for Topic 2

1. Which of the following is NEVER the job for a company's treasurer: a. Advising the chief executive officer of the firm on financial matters b. Deciding how and where to use the excess cash for the firm c. Deciding how to manager and pay taxes for the firm d. Deciding where to invest money for the firm e. Deciding how to raise money for the firm

c. Deciding how to manager and pay taxes for the firm Conceptual: See slides for Topic 1

Which of the following actions would be an example of an agency problem: a. Agreeing to pay bonus based on how the stock price performs b. Refusing to lower selling price if increases losses c. Increasing 2019 profits if it would lower the share price d. Refusing to expand company if it means its best employees will leave e. None of the above is an example of an agency problem

c. Increasing 2019 profits if it would lower the share price Increasing short-term profits may sometimes harm the long-term performance of the firm. If investors realize this, then even increasing profits may lead to lower share prices.

12. Conflicts of interest between stockholders and management is called: a. Stockholders' liability b. Corporate breakdown c. The agency problem d. Corporate activism e. Legal liability

c. The agency problem Conceptual: See slides for Topic 2

18. Which of the following best describes why a firm produces financial​ statements: a. To show activities a firm has undertaken in the previous ​ year, and what activities are planned for the future b. To increase the value of a firm c. To provide a means for investors to obtain information about a​ firm, with an overview of its short- and long-term financial conditions d. To use as a tool when planning future investments within a firm e. None of the above

c. To provide a means for investors to obtain information about a​ firm, with an overview of its short- and long-term financial conditions Conceptual: See slides for Topic 1

7. The main advantage of a sole proprietorship is that it: a. Has limited liability b. Is not usually limited to the life of the owner c. Pays taxes at the personal income tax rate which is usually lower d. Does not require anything more than a few business licenses to start e. none of the above

d. Does not require anything more than a few business licenses to start Conceptual: See slides for Topic 2

Capital structure refers to: a. The organisational structure of a firm b. The structure of how a firm will claim depreciation on fixed assets c. The structure of how a firm interacts with capital or financial markets d. The mixture of debt and equity used by the firm Conceptual: See slides for Topic 1 e. None of the above

d. The mixture of debt and equity used by the firm Conceptual: See slides for Topic 1

15. Which of the following is NOT a mechanism designed to fix agency problems: a. Making managers shareowners b. Rewarding managers based on performance c. Allow badly run firms to be acquired by other better firms d. Placing a lot of restrictions on activist investors e. Allowing for claw-back and escrow of bonuses and salaries

d.. Placing a lot of restrictions on activist investors Activist investors force firms to act in the best interests of shareholders. If they are restricted, then it will encourage managers to misbehave, exacerbating agency problems.

The corporate document that sets forth the business purpose of the firm is: a. Indenture contract b. State tax agreement c. Corporate bylaws d. Debt charter e. Articles of incorporation

e. Articles of incorporation

10. In an ideal world, of the following, the best goal a finance manager can have is to: a. Maximize the dividends per share of existing stock b. Maximize the profitability of the firm c. Avoid financial distress d. Maintain steady growth in both sales and net earnings e. Maximize the current value per share of existing stock

e. Maximize the current value per share of existing stock. Conceptual: See slides for Topic 2

16. What was done in response to the scandals of Enron, WorldCom, Tyco, etc.: a. Nothing was done in response to these scandals b. The Dodd-Frank Act was passed c. The Glass-Stegall Act was passed d. The Gramm Leach Bliley Act was passed e. The Sarbanes Oxley Act was passed

e. The Sarbanes Oxley Act was passed Conceptual: See slides for Topic 2