Managerial Finance

What is the formula for computing the internal growth rate (IGR)?

(ROA x b)/(1 - ROA x b)

What is the formula for computing a firm's sustainable growth rate?

(ROE x b)/(1 - ROE x b)

In a for-profit business, owners' equity is equivalent to:

the total value of stock in a corporation

A firm with a 26 percent return on equity earned ______ cents in profit for every one dollar in shareholders' equity.

26

True or false: A way to establish a benchmark for ratio analysis is to identify a peer group.

true

True or false: It is important to investigate trends in financial ratios to identify the reason for the trend.

true

True or false: Profit margin equals net income divided by sales.

true

Ensuring that the firm has sufficient funds to continue operations on a day-to-day basis comes under the heading of __________ management.

working capital

Days' sales in receivables is given by the following ratio:

365/Receivables turnover

Which of the following are true of a sole proprietorship?

A proprietorship has a limited life. It is one of the simplest types of businesses to form

Which of the following are true of a sole proprietorship? (Selct all that apply.)

A proprietorship has a limited life. It is one of the simplest types of businesses to form.

The relationship between stockholders and management can best be described as a(n) ______ relationship.

Agency

Which one of these will decrease a firm's sustainable rate of growth?

An increase in the dividend payout ratio

The price-earnings ratio is _____ , per share divided by _____ per share.

Blank 1: price Blank 2: earnings

True or false: Blue Company and Red Company have equal levels of current assets and current liabilities. Blue Company has higher inventory levels than Red Company. Blue Company is more liquid than Red Company.

False

Business finance is broadly concerned with which of the following (select all that apply)?

How to finance long-term investments Which long-term investment to make How to manage day-to-day finances of the firm

A good financial decision will do which of the following?

Increase the value of the firm's existing stock Increase market value of shareholders' equity

When are corporate profits taxed?

Individuals pay taxes on corporate dividends. Corporations pay taxes on corporate profits.

Which one of the following does not affect ROE according to the DuPont identity?

Investor sentiment

Why don't large businesses organize as sole proprietorships or partnerships?

It can be difficult to raise cash for investment in these forms, and that limits the ability of the business to grow.

Which of the following is true about the sustainable growth rate?

It is the maximum rate of growth a firm can maintain without increasing its financial leverage.

How does the Sarbanes-Oxley Act primarily work to make sure that companies tell the truth in financial statements?

It makes management personally responsible for the accuracy of a company's financial statements.

Long-term solvency ratios measure what aspect of the firm's financial position?

Its financial leverage

How is the price-earnings (PE) ratio computed?

Market price per share/Earnings per share

How is the market-to-book ratio measured?

Market value per share/Book value per share

In an over-the-counter market, which of the following is true?

Most of the buying and selling is done by the dealer. Many dealers are also connected electronically.

Which one of the following is the correct equation for computing return on assets (ROA)?

Net income/Total assets

Which of the following is the correct equation for return on equity?

Net income/Total equity

Why would the threat of a takeover motivate a manager to act in stockholders' interest?

Running the firm well and acting in the stockholders' interest makes the firm a less attractive takeover target to begin with.

________ financial statements enable one to compare firms that differ in size.

Standardized

Managerial compensation is often tied to financial performance. One way to make this tie explicit is to offer payment in terms of:

Stock Options

What does it mean when a company reports ROA of 12 percent?

The company generates $12 in net income for every $100 invested in assets.

What does it mean when a firm has a days' sales in receivables of 45?

The firm collects its credit sales in 45 days on average.

Which of the following create problems with financial statement analysis?

The firm or its competitors are conglomerates The firm and its competitors operate under different regulatory environments. The firm or its competitors are global companies.

Based on the sustainable growth rate, which of the following factors affect a firm's ability to sustain growth?

The four factors that affect a firm's sustainable growth rate are profit margin, dividend policy, financial policy, and total asset turnover.

What is the impact on the total asset turnover ratio if sales increase significantly while there is no change in any of the other variables?

The total asset turnover ratio will increase.

Which of the following is (are) true of financial ratios?

They are used for comparison purposes. They are developed from a firm's financial information.

What is the primary objective of an auction market?

To bring buyers and sellers together

Which corporate officer is responsible for managing the firm's cash?

Treasurer

True or false: In a large corporation, stockholders and managers are usually separate groups.

True

An organization must prepare ______ and bylaws when forming a corporation.

articles of incorporation

A problem with the TIE ratio is that it is based on EBIT, which is not a measure of _____ available to pay interest.

cash

Working capital includes which of the following?

cash short-term assets inventory

A firm with a market-to-book value that is greater than 1 is said to have ______ value for shareholders.

created

The current ratio computes the relationship between ____.

current assets and current liabilities

The cash ratio is found by dividing cash by:

current liabilities

Over the past year, the current assets account on the common-size balance sheet of a firm has decreased, while the current liabilities account on the common-size balance sheet of the same firm increased. The firm has_____ its liquidity over the past year.

decreased

Return on assets equals net income _____, Correct Unavailable by total assets.

divided

The _____ payout ratio equals cash dividends divided by net income.

dividend

Financial statement analysis is primarily "management by ________ ."

exception

True or False: "Profit maximization" is the goal for the management of a corporation in short-run only.

false

True or false: If a company has inventory, the quick ratio will always be greater than the current ratio.

false

True or false: If there is a conflict between market and accounting data, accounting data should be given precedence.

false

True or false: Market-to-book ratio equals book value per share divided by market value per share.

false

True or false: Receivables turnover is cost of goods sold divided by accounts receivable.

false

True or false: The DuPont identity is a popular expression breaking ROA into three parts.

false

True or false: The dividend payout ratio equals cash dividends divided by sales.

false

True or false: The price-earnings ratio is price per share times earnings per share.

false

True or false: The retention ratio equals one minus the ROA.

false

True or false: The times interest earned ratio is EBIT minus interest.

false

True or false: There is a solid and prescriptive method to select which ratios to use in financial statement analysis.

false

Long-term solvency ratios are also known as:

financial leverage ratios

________ ________ are the prime source of information about a firm's financial health.

financial statements

A partnership in which partners share in gains or losses, and carry unlimited liability for all partnership debts, is called a:

general partnership

Given an internal growth rate of 3 percent, a firm can _____.

grow by 3 percent or less without any additional external financing

The information needed to compute the profit margin can be found on the ____.

income statement

An increase in a firm's total asset turnover will ______ the sustainable growth rate.

increase

If sales increase while there is no change in accounts receivable, the receivables turnover ratio will

increase

Inventory turnover is cost of goods sold divided by

inventory

If the management of a company has been unsuccessful at creating value for their stockholders, the market-to-book ratio will be:

less than 1

Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its

liquidity

Short-term solvency ratios are also called _____ ratios.

liquidity

Capital budgeting is concerned with making and managing expenditures on _____.

long-term assets

Time-trend analysis is an example of

management by exception

Whenever ___________ information is available, it should be used instead of accounting data.

market

The price-earnings (PE) ratio is a ____ ratio.

market value

Based on the DuPont Identity, an increase in sales, all else held equal, __________ ROE.

may increase or decrease may not change

The retention ratio equals one _____ the dividend payout ratio.

minus

A firm may use a price-sales ratio when it has had _____(negative/positive) earnings over the past year.

negative

A business without separate legal authority formed by two or more people is known as a _____.

partnership

A limited liability company is taxed like a _________, but retains ________ ________ for owners.

partnership; limited liability

_____ group analysis is a way to establish a benchmark when using ratios.

peer

One of the most important uses of financial statement information within the firm is:

performance evaluation

If a company has had negative earnings for several periods they might choose to use a __________.

price-sales ratio

The DuPont identity shows that ___ ___times total asset turnover times equity multiplier equals ROE.

profit margin

Return on assets (ROA) is a measure of _____.

profitability

Return on equity (ROE) is a measure of _____.

profitability

In a common-size income statement, each item is expressed as a percentage of total

revenue

Receivables turnover is _____ , Correct Unavailable divided by accounts receivable.

sales

The profit margin is equal to net income divided by

sales

The profit margin is equal to net income divided by ______.

sales

The times interest earned ratio is a measure of long-term

solvency

Who elects the board of directors, and ultimately maintains control of the firm?

stockholder

True or false: The cash ratio is found by dividing cash by current liabilities.

true

True or false: The total debt ratio equals the total assets minus total equity all over total assets.

true

Which of the following are defining features of the primary market?

It is the market where initial public offerings are made Proceeds from the sale of securities goes to the issuing firm

If you hire a real estate company to sell your house, you are most apt to encounter which one of the following?

Agency Problem

A general partnership has which of the following characteristics?

All the partners share in gains or losses of the partnership. Each owner has unlimited liability for all firm debts.

The New York Stock Exchange is a(n) _____.

Auction Market

The federal government taxes which of the following?

Corporate earnings and shareholder dividends

Public limited companies and joint stock companies are other names for

Corporations

Which of the following are reasons that the corporation is the most important form of business?

Corporations are separate legal entities. Corporations can sue and be sued. Corporations can enter contracts.

Which of the following is a disadvantage of sole proprietorships and partnerships?

Difficulty of transferring ownership

Which of the following are considered non-owner stakeholders in a company?

Employees, Government, Suppliers

Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?

Enron, WorldCom, Tyco

True or false: Financial ratios are computed using only balance sheet information.

FALSE

True or false: The Sarbanes-Oxley Act provides incentives for companies to go public in US markets.

False

True or false: The current ratio will decrease if current assets increase, while everything else remains unchanged.

False

Which of the following are traditional financial ratio categories?

Financial leverage ratios Profitability ratios Turnover ratios

What will happen to the current ratio if current assets increase, while everything else remains unchanged?

It will increase.

A corporation is a distinct ______ entity and as such can have a name and take advantage of the legal powers of natural persons.

Legal

Businesses are motivated to organize as corporations because stockholders in a corporation have _______ liability for corporate debts.

Limited

Which one of these is an important mechanism used by unhappy stockholders to replace current management?

Proxy fight

Which of the following represents the receivables turnover ratio?

Sales/Accounts receivable

Which one of the following equations defines the total asset turnover ratio?

Sales/Total assets

A corporation receives cash from financial markets by selling ______ and ______.

Stocks and Bonds

A shareholder's liability is limited to which of these?

The amount the shareholder invested in the corporation

Which of the following best explains why financial managers use a common-size income statement?

The common-size income statement can show which costs are rising or falling as a percentage of sales.

What is the main goal of financial management?

To maximize current share value

where does cash generated by a corporation typically go?

To pay corporate taxes Reinvested in the firm Paid to shareholders and creditors

Which one of the following best explains why financial managers use a common-size balance sheet?

To track changes in a firm's capital structure

True or false: In a common-size income statement, each item is expressed as a percentage of total sales.

True

The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes _____ to sell.

a long time

The Sarbanes-Oxley Act requires corporate officers to:

be responsible for errors in the annual report confirm the validity of the financial statements

True or false: Inventory turnover is sales divided by inventory.

false

One of the important questions in the area of investments includes the potential risks and reward associated with investing in ----- , assets.

financial

What type of partnership involves both general and limited partners to run the business?

limited partnership

Which of the following are included in a firm's capital structure?

long-term debt, equity

When one owner or creditor sells to another, the transaction takes place in the _________ market

secondary

The owners of a corporation are called ______.

shareholders

The times interest earned ratio is a measure of long-term____

solvency

A common-size balance sheet expresses accounts as a percentage of ______.

total assets

A corporation borrows money in its own name.

true

A firm with a profit margin of 10% generates ______ in net income for every dollar in sales.

10 cents

Cal's Market has return on equity (ROE) of 15 percent. What does this mean?

Cal's generated $.15 in profit for every $1 of book value of equity.

______ budgeting is the process of planning and managing a firm's long-term assets.

Capital

What topics are of interest to a financial manager?

Capital budgeting, Capital Structure, Working Capital Management

Which term applies to the mixture of debt and equity maintained by a firm?

Capital structure

Which of the following items are used to compute the current ratio?

Cash Accounts payable

In large firms, financial activity is usually associated with which top officer?

Chief financial officer

Which of the following would help a company take action to improve its ratios?

Comparing to major competitors Comparing to peer companies Comparing to aspirant companies Comparing to its own historical ratios

How is the inventory turnover ratio computed?

Cost of goods sold/Inventory

Which of these topics is not of especial interest to a financial manager?

Debt

The _________ identity can help to explain why two firms with the same return on equity may not be operating in the same way.

DuPont

Which of the following items is added back to EBIT while calculating the cash coverage ratio, but not while calculating the times interest earned ratio?

Non-cash expenses

How is ownership transferred in a corporation?

Ownership is transferred by gifting or selling shares of stock.

Which of the following are key questions for investments? Select all that apply.

What determines the price of a financial asset? What are the risks and rewards associated with investing? What is the best mixture of financial assets to hold?

The costs incurred due to a conflict of interest between stockholders and management are called ______ costs.

agency

Which of the following is the correct representation of the cash coverage ratio?

(EBIT+depreciation)/Interest expense

Which of the following is the correct representation of the total debt ratio?

(Total assets - Total equity)/(Total assets)

Which corporate officer is responsible for accurate financial accounting of the firm's activities?

Controller

The four basic areas of finance include investments, financial institutions, international finance, and

corporate

The cash coverage ratio adds ______ to operating earnings (EBIT) for a better of measure of how much cash is available to meet interest obligations.

depreciation