Exam #1 Smart Book - CHP 1 -

The price of a 12% semiannual coupon bond with five years to maturity and a yield to maturity of 8% is

$1,162.22

A firm with $29,261 in sales, liabilities of $100,000 and total assets of $13,500 produces Blank______ in sales for each dollar invested in assets

$29,261/$13,500 = $2.17

What are the two questions to be asked in ascertaining how effective managers will be in advocating for stockholders' best interests?

- How closely are management goals aligned with stockholder goals? - Can managers be replaced if they do not pursue stockholder goals?

Which of these are characteristics of non-SEC registered commercial paper?

- Original maturity of 270 days or less - Frequently backed by a bank line of credit - Lower interest rate than that charged by a bank for a direct loan

Which of the following can be used to encourage managers to act in the best interests of shareholders?

- Stock options and bonuses - Monitoring through reports - Managerial compensation tied to performance - The threat of termination

Better Life Inc. had net income of $375,000 on sales of $3.5 million and assets of $4.1 million this year. What is the profit margin?

10.71% Profit Margin = Net Income/Sales

Equity Multiplier

Assets/Total Equity

Which of the following are non-cash expenses on the income statement?

Depreciation expense Amortization expense

What does ROA equal?

Profit margin × Total asset turnover ROE/Equity multiplier

A firm with $600,000 in sales, cash on hand of $750,000, liabilities of $200,000 and total assets of $1 million has a total asset turnover of Blank______ times.

Total asset turnover=$600,000/$1m = .60

The goal of financial management is to maximize the current value (per share) of the existing stock.`

True

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

agency

The left side of a balance sheet shows a firm's current and fixed

assets

A bad financial decision is defined as a decision that Blank______ owners' equity.

decreases

Dividend payments belong to the category of Blank______.

long-term financing expenses

When a large group owns stock in a company, stockholders individually have very little power to control the direction of the firm. This means that effectively controls the firm.

management

The financing of current assets is measured as the proportion of Blank______ used to finance current assets.

short-term debt to long-term debt

Ideally, short-term assets are financed with

short-term liabilities

Which of the following would allow analysts to compare the financial leverage of different size firms?

standardized balance sheet

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

Chief financial officer

Which three of the following are most apt to create problems when comparing financial statements for multiple firms?

Differing fiscal years Differing accounting methods Seasonality

If expected inflation rises, market interest rates will rise. How will this impact the prices and yields of existing bonds?

The prices of existing bonds will fall and the yields will rise.

BC Corporation had sales of $1,000,000 and costs of goods sold of $450,000 for the year. Inventory at year end was $180,000. What is the inventory turnover?

$450,000/$180,000 = 2.5

For U.S. manufacturing, mining, and trade corporations, current assets as a percentage of total assets has declined since the 1960s. Which of the following are reasons for that decline?

- Efficient cash management - Efficient inventory management

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

Which short-term financial managers are involved with selling on credit?

- The controller - The credit manager - The marketing manager

The two major elements of a firm's short-term financial policy are Blank______.

- the financing of current assets - the size of the firm's investment in current assets

Wilt's has a 45-day collection period. If you assume a 90-day quarter, then Wilt's cash collections in Quarter 2 are equal to Blank

.5 × Quarter 1 sales + .5 × Quarter 2 sales

Which of the following is the formula for days' sales in inventory?

365 days divided by inventory turnover

Why would it not make sense for a firm to set financial goals like "maximize profits" or "minimize costs"?

A sole focus on items like this may lead to ignoring what is in the stockholders' long-term best interests.

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

Agency

The owners of a firm wish to make a risky investment with upside, as the value of the stock may go up. Management wants to avoid this investment, as there is significant risk, and jobs may be lost as a result. This is an example of an

Agency Cost

Which of the following are non-cash expenses on the income statement?

Amortization expense Depreciation expense

Financial analysis uses EBITDA over EBIT because the former adds back Blank______ and Blank______ and is thus a better measure of pretax operating cash flow

EBITDA adds back depreciation and amortization expenses to remove the effect of those non-cash items from EBIT.

All financial statements for all firms worldwide are prepared in conformance with GAAP.

False

Identify which assets last a long time and include items such as equipment, land, machinery or buildings.

Fixed

Banks prefer lend to firms whose times interest earned ratio indicates that earnings are Blank______ interest payments.

Greater than

What does ROE equal?

ROE = Net Income/Equity, which is also Net Income/Assets X Assets/Equity. ROA = Net Income/Assets, and Equity multiplier = Assets/Equity, so ROE = ROA X Equity Multiplier.

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

Reason: Employees, suppliers, and the government are stakeholders as they have a financial interest in the firm. Stockholders are excluded because they are the owners of the firm.

Total Asset Turnover

Sales/Assets

Which three of the following are most apt to create problems when comparing financial statements for multiple firms?

Seasonality Differing accounting methods Differing fiscal years

Which three of the following are most apt to create problems when comparing financial statements for multiple firms?

Seasonality Differing fiscal years Differing accounting methods

What happens when a firm creates value?

Shareholder wealth increases.

financial statements provide for comparison of firms that differ in size.

Standardized

Which of the following would allow analysts to compare the financial leverage of different size firms?

Standardized balance sheet

Days' sales in inventory are calculated as 365 days divided by inventory

Turnover

Which of the following is the formula for the cash ratio?

cash divided by current liabilities

An important accounting goal is to report financial information to users in a way that is useful for Blank

decision making

Financial analysis uses EBITDA over EBIT because the former adds back Blank______ and Blank______ and is thus a better measure of pretax operating cash flow.

depreciation expense amortization expense

A times interest earned (TIE) ratio of 3.5 times means a firm has Blank______ that is(are) 3.5 times greater than the firm's interest expense.

earnings before interest and taxes

The marketing manager may want easier credit terms to increase sales, but the credit manager may worry about

higher receivables and bad debt risk

Since the 1960's, the U.S. manufacturing, mining, and trade corporations have signaled a move towards a more Blank______short-term financing policy.

restrictive

Financial ratios are ways of comparing and investigating:

the relationship between pieces of financial information.

The present value of a bond or other debt instrument is

the value today of all the future cash flows from this investment.

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

total assets

AD corporation had sales of $750,000 and costs of goods sold of $350,000. Inventory at year end was $87,500. What is the inventory turnover?

Inventory turnover = COGS/Inventory =4 times

AD corporation had sales of $750,000 and costs of goods sold of $350,000. Inventory at year end was $87,500. What is the inventory turnover?

Inventory turnover = COGS/Inventory = 4.0 times

A very short-term creditor might be interested in the cash ratio, which is cash divided by current

Liabilities

Since ownership in a corporation can be dispersed over a huge number of stockholders, it can be argued that Blank______ effectively controls the firm.

Management

Which of the following, according to the textbook, are possible financial goals for a company?

Maximize profits Minimize costs Survival

Profit margin Formula

Net Income / Sales

If the inventory period is 98 days, the receivables period is 36 days, the payables period is 43 days, and the receivables turnover is 7 times, what is the operating cycle?

Operating cycle = Inventory period + Accounts receivable period 98 days + 36 days = 134 days