Corporate Finance Test 1

The internal growth rate of a firm is best described as the:

Maximum growth rate achievable excluding external financing of any kind.

In class, we learned that the capital budgeting decisions of managers determine ___________ of the "pie", while capital structure decisions determine __________ of the "pie".

the size; the cut

Suppose IBM has a total asset turnover of 1.46 percent, a profit margin of 8.00 percent, an equity multiplier of 1.20, and a dividend payout ratio of 32.00 percent. What is IBM's sustainable growth rate?

10.53 percent

3M Company's current price is $198.65 per share. Assuming that 3M currently has 597,000,000 shares outstanding, its current market cap is:

118.59

Which one of the following terms is defined as the management of a firm's long-term investments?

Capital budgeting.

Non-cash items refer to:

Expenses which do not directly affect cash flows

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

Corporate shareholders:

have limited liability.

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?

income statement

Which one of the following is included in net working capital?

inventory

When constructing a pro forma statement, net working capital generally:

Varies proportionally with sales.

Common-size financial statements present all income statment account values as a percentage of:

sales

Cash flow to stockholders is defined as:

dividends paid minus net new equity raised.

The need for external financing

will limit growth if left unfunded.

The short-run, day-to-day financial operations of a firm are primarily controlled by managing the:

working capital.

Which account links the income statement to the balance sheet?

Retained earnings

A firm has inventory of $11,400, accounts payable of $9,800, cash of $850, net fixed assets of $12,150, long-term debt of $9,500, accounts receivable of $6,600, and total equity of $11,700. What is the common-size percentage for the net fixed assets?

39.19%

Downtown Computer has sales of $521,000, a profit margin of 14.8 percent, a total asset turnover rate of 2.16, and an equity multiplier of 1.30. What is the return on equity?

41.56%

The balance sheet of a firm shows beginning net fixed assets of $348,200 and ending net fixed assets of $371,920. The depreciation expense for the year is $46,080 and the interest expense is $11,460. What is the amount of the net capital spending?

69,800

The Soccer Shoppe has a 9 percent return on assets and a 25 percent payout ratio. What is its internal growth rate?

7.24 percent

Bonner Automotive has shareholders' equity of $218,700. The firm owes a total of $141,000 of which 40 percent is payable within the next year. The firm has net fixed assets of $209,800. What is the amount of the net working capital?

93,500

All else equal, which one of the following will increase the internal growth rate?

A decrease in total assets.

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?

Agency problem.

You would like to borrow money three years from now to build a new building. In preparation for applying for that loan, you are in the process of developing target ratios for your firm. Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future?

Cash coverage ratio = 2.6; debt-equity ratio = 0.3

Which one of the following is most apt to align management's priorities with shareholders' interests?

Compensating managers with shares of stock that must be held for three years before the shares can be sold

Which type of business organization has all the respective rights and privileges of a legal person?

Corporation.

Which one of the following will decrease the liquidity level of a firm?

Credit sale of inventory

Which one of the following is a use of cash?

Decrease in accounts payable

An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values.

Decrease in the quick ratio.

For a tax-paying firm, an increase in _____ will cause the cash flow from assets to increase.

Depreciation expense.

Which one of the following is a working capital management decision?

Determining whether to pay cash for a purchase or use the credit offered by the supplier.

Which one of the following accurately describes the three parts of the DuPont identity?

Equity multiplier, profit margin, and total asset turnover.

Which one of the following is a capital structure decision?

Establishing the preferred debt-equity level.

A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a:

General partnership.

If a firm produces a 13 percent return on assets and also a 13 percent return on equity, then the firm:

Has an equity multiplier of 1.0.

Financial planning accomplishes which of the following for a firm? I. Determination of asset requirements. II. Development of contingency plans. III. Establishment of priorities. IV. Analysis of funding options.

I, II, III, and IV.

Which of the following are expenses for accounting purposes but are not operating cash flows for financial purposes? I. Interest expense II. Tax expense III. Cost of goods sold (COGS) IV. Depreciation expense

I. and IV. only

Fanny Rose Candy Shop reduced its fixed assets this year without affecting the shop's operations, sales, or equity. This reduction will increase which of the following ratios? I. Interval measure II. Return on assets III. Total asset turnover IV. Return on equity

II and III only

Which one of the following actions by a financial manager is most apt to create an agency problem?

Increasing current profits when doing so lowers the value of the firm's equity.

Boston Market currently has a dividend payout ratio of 30 percent. The firm does not want to issue additional equity shares nor increase its debt at this time. The firm is profitable. Which one of the following defines the maximum rate at which this firm can profitably grow?

Internal growth rate

Why do accountants include depreciation expense in their calculation of net income despite the fact that no cash actually leaves the firm?

It helps lower the firm's taxes.

Which one of the following best states the primary goal of financial management?

Maximize the current market value per share.

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 statements concerning a sole proprietorship is correct?

The owner of a sole proprietorship is personally responsible for all of the company's debts

The plowback ratio is:

The percentage of net income available to the firm to fund future growth.

The cash coverage ratio is used to evaluate the:

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