V361 Exam 1

When a firm chooses to buy new fixed net assets it is making a working capital decision or capital budgeting decision

working capital decision

When a firm makes decisions regarding its investment in inventory and accounts receivable it is making financing decision or working capital decision

financing decision

All else equal, which of the following would be considered a use of cash? select all that apply a. accounts receivable increase b. common stock and surplus increases c. accounts payable decrease d. net fixed assets decrease by the amount of depreciation

Answer: a

Which of the following markets is considered a dealer market? a. The over-the-counter market b. The New York Stock Exchange c. The American Stock Exchange

Answer: a

Which of the following are correct regarding agency costs? Select all that apply. a. Indirect costs occur when managers, acting to minimize the risk of the firm, forego investments shareholders would prefer they take. b. Direct costs occur when managers buy assets considered unnecessary by the firms owners. c. Direct costs occur when shareholders must incur costs to monitor their managers actions.

Answer: a, b, c

Which of the following help ensure managers act in the best interest of owners? Select all that apply. a. a compensation package for managers that ties their salary to the firms share price. b. If there is a high degree of likelihood the firm will become a takeover candidate if the firm performs poorly. c. The incentives managers have for being promoted or having better job prospects if the firm prospers. d. The threat that if the firm does poorly, shareholders will use a proxy fight the replace existing management.

Answer: a, b, c, d

A financial manager is responsible for deciding whether or not new manufacturing should be purchased to replace existing equipment. The new equipment would reduce labor expenses and would allow the firm to reduce its investment in inventory. Which of the financial management areas would be involved in the decision process? a. Working capital management b. Capital budgeting c. Capital structure management

Answer: b

What does the fixed asset turnover ratio measure? a. The amount of EBIT a firm generates per dollar of fixed assets. b. the amount of sales each dollar of fixed assets generates. c. The percent of total assets that are invested in fixed assets. d. the length of time it takes a firm to completely replace its fixed assets e. How well total assets are utilized during a year

Answer: b

When does the double taxation problem faced by a corporation exist? a. Whenever a corp earns a profit and pays taxes on a profit. b. Whenever a corp earns a profit, pays taxes on that profit and then pays dividends to its stockholders who are taxed. c. Whenever stockholders are paid a dividend and taxed on that dividend income. d. Whenever a corporation earns a profit, pays taxes on that profit, and then pays interest to its shareholders. e. Whenever a corporation earns a profit, pay taxes on that profit, and then pays interest to its bondholders who are taxed.

Answer: b

Which of the following could be computed with the use of only a balance sheet? a. Return on equity b. equity multiplier c. receivables turnover d. interval measure e. times interest earned

Answer: b

Which of the following statements accurately describes the relationship between book value and market value? a. Financial managers should always evaluate book values, not market values, when making decisions for the firm. b. book value is an accounting summary of value and is inferior to the market value as information for financial managers c. The market value of current assets is often difficult to determine d. Market value always exceeds book value e. Market value is rarely different from book value because the economic worth of an asset and/or long-term liability does not change over time.

Answer: b

In reviewing income statements, a financial manager should (BLANK) a. ignore noncash deductions since they are typically quite small and have little impact on cash flow b. realize that the income statement is written so as to follow GAAP rules of "realization" which means it is constructed to clearly indicate the firm's cash flow c. note that costs on the income statement can be considered fixed or variable, depending on the time horizon considered d. base all operating decisions on the "bottom line" i.e. net income e. ignore interest expense since it represents a noncash deduction

Answer: c

The increase in current assets over current liabilities over a period of time is called: a. financing cash flow b. operating cash flow c. changes in net working capital d. gross income e. capital spending

Answer: c

Which of the following is NOT incorporated into calculations of the Du Pont identity a. equity multiplier b. profit margin c. receivables turnover d. total asset turnover e. return on assets

Answer: c

Which of the following is equivalent to the "balance sheet identity": a. total assets plus equity equals total liabilities b. total liabilities plus total assets equals equity c. total assets minus total liabilities equals equity d. total assets minus long-term debt equals equity e. total liabilities minus equity equals total assets

Answer: c

Which of the following is generally true regarding liquidity as it relates to the firm? a. liquidity is detrimental to a firm because it allows the firm to pay its bills more easily, thereby avoiding financial distress b. Liquid assests generally earn a large return, especially in comparison to illiquid assets c. Liquidity is valuable to a firm because liquid assets can be sold quickly without much loss in value d. Liquidity is valuable to a firm bc a firm can borrow money using its liquid assets, such as a warehouse as collateral e. Assets are generally listed on a firm's balance sheet in the order of increasing liquidity

Answer: c

You are interested in purchasing 100 shares of stock in one of the largest corporations in the US. You would most likely purchase shares in: a. a secondary market operated as a dealer market b. a primary market operated as a dealer market c. a secondary market operated as an auction market d. a secondary market operated as a money market e. a primary market operated as an auction market

Answer: c

The (BLANK) tax rate is the rate that applies if one more dollar of income is earned and the (BLANK) tax rate is the total tax bill divided by the taxable income. a. flat; marginal b. flat; average c. marginal; flat d. marginal; average e. average; marginal

Answer: d

Which of the following are considered a source of cash? Select all that apply. a. Accounts receivable decrease b. common stock and surplus decrease c. inventory increases d. accounts payable increase

Answer: d

Which of the following statements is a true statement? a. The balance sheet tells investors exactly what the firm is worth b. The balance sheet equity account represents the market value of the firm to its shareholders. c. Accounting income is generally equal to cash flow d. Accounting statements are usually prepared to match the timing of income and expenses e. Assets are usually listed on the balance sheet as market value.

Answer: d

A financial manager of a corporation is considering different operating strategies for the coming year. From a financial management standpoint, which of the following would be her optimal strategy? a. to undertake the plan that wold reduce overall riskiness to the firm. b. to undertake the plan that would maximize her personal wealth. c. to undertake the plan that would result in the largest profits for the year. d. to undertake that plan that would lead to the most stable stock price for the year. e. to undertake the plan that would maximize current stock price.

Answer: e

A(n) BLANK transaction occurs when a firm first sells its shares to the investing public. a. secondary market b. money market c. bond market d. cash market e. primary market

Answer: e

According to the balance sheet model of the firm, corporate finance may be thought of as the analysis of three primary subject areas. Which of the following groups correctly lists these three areas? a. capital structure, capital budgeting, security analysis b. capital budgeting, capital structure, capital spending c. capital structure, net working capital, capital rationing d. capital budgeting, capital spending, net working capital e. capital budgeting, capital structure, net working capital

Answer: e

Which of the following assets is generally considered to be the most liquid a. long term debt b. inventory c. net fixed assets d. a patent or trademark e. accounts receivable

Answer: e

Which of the following is NOT considered one of the basic questions of corporate finance? a. What mixture of debt and equity should the firm use to fund its operations b. How should the firm manage its working capital, i.e., its everyday financial activities. c. What long-term investments should the firm take d. Where will the firm get the long-term financing to pay for its investments e. At what rate of interest should a firm borrow

Answer: e

26. Which of the following is NOT included in the operating activities portion of a typical statement of cash flows?

Changes in Notes payable

Xman Corp has just decided to lower its amount of debt outstanding replacing it with the proceeds from a new equity issue. This adjustment is a: working capital decision or capital budget decision

capital budgeting decision

Which of the following is a use of cash for a firm? Common stock and surplus increase or accounts payable increase

common stock and surplus increase