finance 301 exam 1

what is the purpose of the statement of cash flows?

reconcile changes in the cash account

Why is the price of oil important? A) It reflects economic demand B) It is correlated with stock prices C) It is considered a measure of inflation D) It reflects fear in the market E) It is considered a value store

reflects economic demand

-company managed according to the interests of the majority owner

rest of world model

how does management create shareholder value?

return on investment > cost of capital

Beta is used in the capital asset model primarily as a measure of A) Trading volume B) Earnings growth C) Risk D) Valuation E) Profitability

risk

-CEOs must sign off on financial statements -management is accountable for accuracy of financial statements -audit committees must be composed of outside directors -companies cannot make loans to directors

sarbanes-oxley act of 2002

what is the equation for market capitalization?

shares outstanding x price per share

Which of the following would NOT help the cash conversion cycle? A) Improving your credit terms B) Shortening the operating cycle C) Shortening your payables period D) Increasing your inventory turnover E) Lengthen your collections period

shortening your payables period

Which of the following did NOT happen during the 2000s financial period? A) Crash and scandals B) Growth with debt C) Shrinking debt market D) Bumpy recovery E) Financial crisis

shrinking debt market

describe the organizational form: -easy to form -profits taxed as income -liable for liabilities -difficult to raise capital

sole proprietorship

protected by contracts

stakeholders

the separation of ownership and control of corporate assets

agency problem

True or False: On a common size balance sheet, assets will always be 100%.

true

True or False: Small-cap stocks are riskier than corporate bonds. A) True B) False

true

The basic principles of finance dictate that in the short-run, stock prices are driven by A) Supply & Demand B) Interest Rates C) Corporate earnings D) All of the above E) Valuation

A) Supply & Demand

what is the equation for calculating stock return?

(initial stock price-ending stock price) + dividends / initial stock price

what type of depreciation are used when doing taxes? why?

-accelerated -lower profit and taxes

what are the 3 areas of finance?

-corporate finance -capital markets and financial institutions -investments and valuation

what are the 4 common elements of financial crisis?

-excessive investment -easy financing -government bailout -it will happen again

what type of depreciation do investors use? why?

-straight line -higher profit

almost _____% of historic stock returns are dividends

50%

what percent of capital comes from internal operations?

70%

what percent of new capital is debt?

90%

20 The price of a barrel of oil (WTI) is currently trading at ________; The S&P 500 is currently trading at ________? A $30; 1,900 B $50; 16,500 C $2; 4,500 D $100; 1,500

A $30; 1,900

39 Which of the following statements is true? A An increase in inventory from one year to the next is a use of cash on the cash flow statement B Operating profit equals sales minus cost of goods sold C Depreciation is subtracted from net income on the cash flow statement D Goodwill includes donations made to charitable organizations E Deferred taxes are taxes that are never paid

A An increase in inventory from one year to the next is a use of cash on the cash flow statement

31 Which of the following is true about financial statements? A Companies keep two sets of books - one for taxes and one for investors B Accounts receivable are part of shareholder's equity C Total Assets should equal Total Liabilities minus Retained Earnings D To reflect current prices, financial statements are based on market and not book values E Income statement shows financial condition of a company at a specific point in time

A Companies keep two sets of books - one for taxes and one for investors

28 Which of the following is a Capital Structure decision? A Paying for new equipment with debt or equity B Building a new manufacturing plant C Increasing employee wages D Managing short-term assets and liabilities E Changing lending policies for customers

A Paying for new equipment with debt or equity

5 Which of the following statements regarding the cash flow statement is true? A Primary Source of Cash is Operating Activities; Primary Use of Cash is Investing Activities B Financing Activities do not have an impact on the Cash Flow Statement C A typical company has a positive cash flow from Investing Activities. D Purchases of PP&E can be either an Operating or Financing Activity, based on the size of the purchase E Depreciation is classified as a cash flow from Financing Activities.

A Primary Source of Cash is Operating Activities; Primary Use of Cash is Investing Activities

6 Which of the following statements about stockholders and stakeholders is true? A Stakeholders are protected by contracts B The federal government is a corporate stockholder C Stockholders have a claim on the firm's cash flows prior to debt holders and suppliers D Stakeholders have a claim to the residual cash flows of the corporation E Employees are not considered stakeholders of a corporation

A Stakeholders are protected by contracts

Which of the following concerning the relationship between risk and return is correct? A. A risk averse investor would prefer a stock with an expected 10% return and a standard deviation of 10% to a stock with an expected return of 10% with a standard deviation of 20% B. Investors generally require a lower return as they take on more risk C. Safer investments tend to have higher returns D. Higher risk investments historically provided lower returns E. A risk taking investor would prefer a stock with an expected 10% return and a standard deviation of 10% to a stock with an expected return of 10% with a standard deviation of 20%

A risk averse investor would prefer a stock with an expected 10% return and a standard deviation of 10% to a stock with an expected return of 10% with a standard deviation of 20%

Which of the following is NOT a correct example of working capital management? A) Issuing long-term debt to finance a new line of products B) Increasing inventory turnover by carefully monitoring specific product categories C) Lowering outstanding inventory by selling it in bulk to retail customers D) None of the above E) Lowering days payable by keeping up-to-date supply chain information

A) Issuing long-term debt to finance a new line of products

Why is investing in long-term assets important? A) It allows companies to grow their revenue in the long run B) It decreases a company's long-term liabilities C) It increases a firm's free cash flow D) It will increase the efficiency of a firm in the short run E) It directly increases the company's market value

A) It allows companies to grow their revenue in the long run

The model of governance in which there are usually very few takeovers and oversight is provided by large equity holders is A) Japan-Germany Dedicated Capital Model B) Anglo-American Model C) Fluid Capital Model D) Minority Owner Model E) Rest of World Majority Owner Model

A) Japan-Germany Dedicated Capital Model

the time value of money implies that

a dollar today is worth more than a dollar tomorrow

Which statement is most accurate about the dual challenges of management? A) They must balance providing high quality products and services while creating shareholder value B) They often must aggressively invest to grow revenue while limiting the amount of liabilities they take on in doing so C) None of the above D) They need to make and execute plans for the long-term while posting consistent short-term results E) They must balance out the compensation for themselves and the employees of the organization

A) They must balance providing high quality products and services while creating shareholder value

Which one of the following is an element of the new corporate finance environment? A. Greater economic volatility and risk B. Lack of complex financial instruments C. Decrease in international trade D. Inflation is less of a factor in corporate finance E. Higher commodity prices

A. Greater economic volatility and risk

What is Berkshire Hathaway's primary business? A. Insurance B. Automobiles C. Investment Banks D. Textiles E. Semi-Conductors

A. Insurance

3. Which of the following is NOT a principle used in investment decisions by Warren Buffett? A. Invest in high growth companies B. Invest in companies you are comfortable owning long term C. Invest in companies with management teams that create shareholder value D. Invest in companies with high and increasing profit margins E. Invest in businesses that you understand

A. Invest in high growth companies

Which of the following is a principle held by Gordon Gekko? A. Management must be accountable to the shareholders B. Management should not have a stake in the company C. Managers that have a stake in the company create a greater potential for the agency problem D. Managerial efficiency is not important E. A company's stakeholders are more important than its stockholders

A. Management must be accountable to the shareholders

Which activity is most likely to increase shareholder value? A. Minimizing the company's cost of capital B. Minimizing the amount of projects the company spends money on C. Financing the company's business with expensive debt D. Maximizing the amount of corporate assets E. Investing in projects that are always the least risky

A. Minimizing the company's cost of capital

Which of the following drives stock price in the short run? A. Supply and Demand B. Treasurer Predictions C. Fundamentals D. Rationality E. Insider Trading

A. Supply and Demand

Which is the primary reason that corporations are the most prevalent organization form? A. The ease of raising capital B. Limited tax liability C. Anyone can form a corporation D. Beneficial corporate governance features E. None of the above

A. The ease of raising capital

1. Which of the following trends is accurate? A. WTI Oil price has declined from over $50 / barrel to roughly $30 / barrel in the past 6 months B. The DJIA has declined 2,000 points over the past 6 months and is currently about 4,000 C. The NASDAQ has risen to historical highs of about 18,000 D. The price of gold has rebounded from lows in the financial crisis and is currently over $2,000 / oz E. Due to Fed Stimulus, the 10-yr Treasury yield has been increasing for the past 5-yrs and stands over 10%

A. WTI Oil price has declined from over $50 / barrel to roughly $30 / barrel in the past 6 months

3 Which of these statements concerning the Principles of Finance is true? A There is an inverse relationship between risk and return B Investors prefer less risk to more risk C A dollar tomorrow is worth more than a dollar today D Markets are inefficient and new information is slowly reflected in the marketplace E Stock prices are not random, but follow a predictable pattern based on Profitability Ratios

B Investors prefer less risk to more risk

35 Which of the following corporate governance model includes partnering companies owning each other's stock? A Anglo-American corporate governance model B Japan-Germany corporate governance model C Rest of World corporate governance model D Democratic corporate governance model E Dodd-Frank corporate governance model

B Japan-Germany corporate governance model

11 Which type of ratios best indicate a company's ability to pay short term obligations? A Profitability ratios B Liquidity Ratios C Leverage ratios D Activity ratios E Efficiency ratios

B Liquidity Ratios

23 The dual challenges to management are to _________ and ___________. A Treat employees well; be a responsible citizen in the community B Produce high quality products/services at competitive prices; provide competitive returns to stock holders C Provide jobs to the communities it serves; provide excellent service to customers D Pay taxes to the government; repay loans to lenders E Have highly satisfied customers; produce a profit for shareholders

B Produce high quality products/services at competitive prices; provide competitive returns to stock holders

Which of the following is NOT one of the elements of the new corporate finance environment? A) None of the above B) Emphasis on executive bonuses C) Greater economic volatility D) Advances in IT and Telecommunications E) Market Institutionalization

B) Emphasis on executive bonuses

What investment vehicle did Charles Ponzi use in the original Ponzi scheme? A) Tulips B) International Reply Coupons C) Junk Bonds D) Stocks and Options E) Mortgage Backed Securities

B) International Reply Coupons

What is one of the challenges of the shareholder value standard? A) It forces management to maintain an extremely long-term time horizon B) It puts too much focus on markets and expectations C) It puts little emphasis on efficiency ratios, such as return on equity D) It often puts stakeholders before stockholders E) It leads to company's ignoring their profit margins and focusing on revenue growth instead

B) It puts too much focus on markets and expectations

Which of the following costs should not be capitalized on the balance sheet? A) Plant, Property, and Equipment B) Selling, General, and Administrative Expenses C) Prepaid Insurance D) Prepaid Rent E) None of the Above

B) Selling, General, and Administrative Expenses

When Professor X started investing with a mutual fund, he had to pay a front-end load of 5% of the money he was investing. What is this front-end load of 5% an example of? A) Bid-Ask Spread B) Transaction Costs C) None of the above D) Taxes

B) Transaction Costs

Which of the following is true of the principles of finance? A. Inflation drives stock prices in the short run B. A dollar today is worth more than a dollar tomorrow C. Investors can beat efficient capital markets by using asset pricing models D. Corporate managers should focus on creating stakeholder value E. Asset allocation is the decision of which individual stocks to invest in

B. A dollar today is worth more than a dollar tomorrow

A management team that creates shareholder value: A. Grows EPS over time B. Generates return on investment greater than the cost of capital C. Ensures cost of capital exceeds return on investment D. Generates positive net income E. Maximizes executive compensation

B. Generates return on investment greater than the cost of capital

Which of the following is one of the three primary areas of finance? A. Tax B. Institutions & Markets C. Audit & Assurance D. Financial Accounting E. International Finance

B. Institutions & Markets

Which of the following is an example of the agency problem? A. Management invests in a project that has a return greater than the cost of capital B. Management invests in private jets for executives C. Management receives compensation based on the company's performance D. Management owns stock in the corporation and supports an increase to the dividend E. Management has stock options in the company, potentially providing large payouts if the company does well

B. Management invests in private jets for executives

Which of the following trends is accurate? A. The price of gold has declined from over $50 / oz to roughly $30 / oz in the past 6 months B. The DJIA has declined 2,000 points over the past 6 months and is currently about 16,000 C. The S&P 500 currently stands at its highest ever level of about 4,000 D. WTI oil price has rebounded from lows in the financial crisis and is currently over $100 / barrel E. Due to Fed Stimulus, the 10-yr Treasury yield has been increasing for the past 5-yrs and stands over 10%

B. The DJIA has declined 2,000 points over the past 6 months and is currently about 16,000

21 Which of the following is true regarding the roles of the Controller and Treasurer A Controller oversees the Treasury of the company; Treasurer is the head of Accounting B Controller is responsible for auditing company financials; Treasurer puts together the financial statements C Controller is responsible for compiling Financial Statements & Reports; Treasurer manages Capital Budgets D Controller reports to the Treasurer; Treasurer reports to the President E Controller is responsible for managing short term capital requirements; Treasurer is reponsible for managing long term capital requirements

C Controller is responsible for compiling Financial Statements & Reports; Treasurer manages Capital Budgets

7 Which of the following is true about the different organizational forms? A Partnerships and Sole Proprietorships profits are double taxed B It is easy to raise large amounts of money in a partnership. C Corporations are the most complex form of business organization to start up D The liability of the owner is limited in a sole proprietorship E Transferring ownership is most difficult for a corporation

C Corporations are the most complex form of business organization to start up

occurs when the target company purchases the acquirers shares at a premium over the market price

greenmail

2 Which of the following is not a tool of finance? A Present value - future value analysis B Financial statements and ratios C Cost-Benefit Analysis D Risk and return models E Spreadsheet modelling

C Cost-Benefit Analysis

18 Which of the following is true? A Top line growth (sales) is more important than bottom line growth (earnings) for companies B The U.S. ranks first in the world in terms of economic freedom C In an efficient market, stock prices reflect stock values D The biggest believers in behavioral finance are finance professors E Depreciation is a use of funds

C In an efficient market, stock prices reflect stock values

30 Which of the following is true according to the tenets of behavoral finance? A Individuals are expected utility maximizers B Markets are always price efficient C Market prices may reflect emotions and biases D Arbitrageurs eliminate any price distortions in the markets E Prices are set based on the theory of rational expectations

C Market prices may reflect emotions and biases

27 Which of the following is true regarding Warren Buffet? A Warren Buffet prefers to invest in high growth companies with high return potential B Warren Buffet owns 100% of Berkshire Hathaway C Warren Buffet likes to invest in companies with positive cash flow and high ROE D Buffet's Company, Berkshire Hathaway, is primarily a consumer goods company E Warren Buffet has underperformed the market in the long run, but is recognized for several major success stories

C Warren Buffet likes to invest in companies with positive cash flow and high ROE

As indicated by Gordon Gekko, the best defense against a takeover is A) Better production facilities B) Good lawyers C) A high stock price D) A high growth rate E) Low costs

C) A high stock price

An individual or group that purchases large numbers of a public company's shares and seeks to make changes to management and structure is known as _________ A) Investment bankers B) Institutional investors C) Activist investors D) Shareholders E) Hedge fund managers

C) Activist investors

Capital structure decisions are concerned with: A) Communication with the markets B) Debt only C) Debt & Equity D) Short term assets & liabilities E) Long term assets

C) Debt & Equity

How can a company improve its cash conversion cycle? A) Launch a marketing campaign to boost sales B) Reduce operating expenses C) Grant customers discounts for paying in cash D) Buy inventory in bulk to save on unit cost E) Pay suppliers faster

C) Grant customers discounts for paying in cash

Which of the following is an element of the new corporate finance environment? A) Outsourcing B) Growth in financial legislation and regulation C) Growth in Trade and Direct Investment D) Lack of debt issuance E) Bankruptcy

C) Growth in Trade and Direct Investment

20. What is NOT true about corporate governance? A) Corporate governance battles often result from companies not being managed in the interest of the owners B) None of the above C) It is the system of rules, practices, and processes by which a company is directed and controlled D) Management teams are rarely shareholders in their own companies E) Many corporate governance battles result in hostile takeovers and proxy battles

C) It is the system of rules, practices, and processes by which a company is directed and controlled

The shift in corporate governance gave corporate executives more incentive to drive their company's performance by compensating them with ________ A) Shares in other profitable companies B) More perks such as corporate jets C) Stock options D) Multi-million Dollar bonuses E) Higher salaries

C) Stock options

What is the Cash Conversion Cycle? A) The number of days from when the company buys inventory to when the customer pays company B) The number of days from when the company buys inventory to the date of the sale C) The number of days the customer pays the supplier to when the customer pays the company D) The number of days it takes for the customer to pay the company E) The number of days from the sale to when the customer pays the company

C) The number of days the customer pays the supplier to when the customer pays the company

According to Danny Devito talking in Other People's Money, why do people invest? A) To provide for employees B) To support management C) To make money D) To help a company E) To do good

C) To make money

Which of the following statements are true regarding traditional and behavioral finance? A. According to behavioral finance, markets are always efficient B. Traditional finance claims that the market goes through cycles based on investor emotions C. According to Traditional finance, the price of a stock always reflects its value D. Behavioral Finance proposes that investor behavior is rational and decisions maximize expected utility E. Traditional finance does not account for arbitrageurs. Arbitrage did not gain popularity until it was introduced by proponents of behavioral finance

C. According to Traditional finance, the price of a stock always reflects its value

As an investor, Warren Buffet prefers companies with which of the following characteristics: A. Industry with few and insignificant barriers to entry B. High Tech Companies C. Companies that generate free cash flow D. Companies with low ROE E. High risk, high return potential

C. Companies that generate free cash flow

Which of the following is an example of a working capital decision? A. Buying new equipment to make production more efficient B. Refinancing long term debt C. Delaying payments to suppliers in order to conserve cash D. Increasing marketing expenditures in an effort to grow sales E. Issuing additional stock in order to take on a new project at the company

C. Delaying payments to suppliers in order to conserve cash

Which of the following is a disadvantage of the Corporate Organizational Form? A. Increased liability B. Difficulty of formation C. Double taxation D. Limited liability E. Ability to raise capital

C. Double taxation

Which of the following drives stock price in the long run? A. Supply and Demand B. Treasurer Predictions C. Earnings D. Rationality E. Insider Trading

C. Earnings

Which of the following is true of the principles of finance? A. Return of a small company stock is lower than the return of a large company stock B. A dollar tomorrow is worth more than a dollar today C. Efficient Capital Markets are tough to beat D. Rational investors are risk takers E. Inflation improves investment returns in the long run

C. Efficient Capital Markets are tough to beat

Which of the following is a common element of financial crises? A. Difficult to obtain financing B. Natural disasters C. Excessive investment in an asset class D. Stock returns are low leading to a crisis E. Unstable currency

C. Excessive investment in an asset class

Which of the following statements regarding business organizational forms is true? A. Partnerships are the easiest business organizational form to establish B. It is more difficult to raise capital in a corporation than in a sole proprietorship C. Liability of owners is limited to their investment in a corporation D. The greatest advantage of a corporation is double taxation E. Corporations have always been the dominant form of business organization

C. Liability of owners is limited to their investment in a corporation

Which of the following is part of the treasurer's function? A. Auditing the company's financials B. Publishing financial statements C. Making capital expenditures D. Monitoring accounting systems E. Filing the company's taxes

C. Making capital expenditures

. Which of the following is a tenet of good management according to Gordon Gekko? A. Managerial efficiency is not important B. Management is not accountable to shareholders C. Management should have ownership in the company D. Shareholder activism hurts a company's stock price E. Managers that have a stake in the company create a greater potential for the agency problem

C. Management should have ownership in the company

What is the main difference between stakeholders and stockholders? A. Stakeholders have a residual claim on the company's cash flows B. Stockholders are protected by contracts with the corporation C. Stakeholders are protected by contracts with the corporation D. Stockholders have a guaranteed payment for what they invest in the corporation E. Stockholders do not have economic interest in a corporation

C. Stakeholders are protected by contracts with the corporation

According to the Theory of Efficient Capital Markets: A. Stock prices do not reflect all publicly available information B. Stock prices take a long time to capture new information C. Stock prices react instantaneously to new information D. Stock prices react positively to all new information E. Investors can easily predict exact stock prices

C. Stock prices react instantaneously to new information

Communication with markets is the responsibility of which role? A) CEO B) VP of Communications C) Treasurer D) CFO E) Controller

CFO

According to the Theory of Efficient Capital Markets: A. Stock prices are not affected by new information B. Current stock prices reflect all publicly available information C. Stock prices adjust to new information slowly over time D. Stock prices only react instantly to positive financial information E. Investors can easily beat the market

Current stock prices reflect all publicly available information

32 Which of the following is a working capital decision? A A company refinances long-term debt at a lower interest rate B A company buys new equipment C A company issues common stock D A company changes its credit policy E A company sells its operations in Ecuador

D A company changes its credit policy

4 Which of the following is common element of a financial crises A A Democrat is usually in the White House B Financial crises occur only about once every 25 years C The Federal Government is seldom involved in a financial crisis D Financial crises usually result from excessive investment in an area of the economy or markets E Financing is virtually impossible to obtain leading up to the crisis

D Financial crises usually result from excessive investment in an area of the economy or markets

Which of the following is true regarding corporate governance? A Management had a high level of stock ownership in the 1980s B In the 1980s CEOs were more likely to be fired than before C CEO's accountability for their performance declined in the 1990s D Japanese companies have fewer takeovers compared to the United States E Hostile takeovers dominated the 1990s

D Japanese companies have fewer takeovers compared to the United States

37 According to the Revenue Recognition Principle in GAAP: A Dividends can be paid only after taxable income is positive B Expenses can be realized when cash payment is made C Companies can realize revenue only if the transaction is profitable D Revenue is recognized when a good or service is provided, not when the money is received E Companies can realize certain gains on their operating books, while omitting them from their tax books

D Revenue is recognized when a good or service is provided, not when the money is received

33 Which of these statements concerning the Principles of Finance is true? A Buying a greater number of stocks increases the risk of your portfolio B Investors prefer more risk to less risk C An asset pricing model should be used only to value diversified portfolios D Transaction costs and inflation reduce your real investment returns E Security selection is more important than asset allocation in long-term investment performance

D Transaction costs and inflation reduce your real investment returns

How did Enron's fraudulent activity come to light? A) Wall Street found mistakes in its financial statements B) Analysts found the company's real financial statements C) FBI investigation D) A whistleblower named Sherron Watkins turned in the executives committing the crime E) None of the above

D) A whistleblower named Sherron Watkins turned in the executives committing the crime

Which is true about specialized financial statements? A) A biotech company will typically have no inventory B) A consulting firm lists long term assets before current assets C) Retailers will never have goodwill D) Banks may have debt equal to 95% of total assets E) Utilities primary assets are intangibles

D) Banks may have debt equal to 95% of total assets

Which statement about the current trends in corporate governance is true? A) Activist investors are not currently major buyers of shares B) The Board of Directors is typically comprised of friends of the CEO C) Defense mechanisms against hostile takeovers are nonexistent D) Company buyouts by Hedge Funds and Private Equity are becoming more prevalent E) The Government typically has representation on company's boards

D) Company buyouts by Hedge Funds and Private Equity are becoming more prevalent

The __________ is considered one of the CFO's traditional responsibilities as financial engineer. A) Financing & Capitalization B) Growth & Acquisitions C) Risk Management D) Controller functions E) Corporate Strategist

D) Controller functions

Which of these investments would be considered the least risky? A) Commodities B) Corporate Bonds C) Large-cap stocks D) Government Bonds E) Small-cap stocks

D) Government Bonds

Successful liability management means _______ A) Keeping debt at a minimum B) Maximizing the amount of debt that the company takes on C) Making sure that the company takes on more long-term debt in order to have enough time to pay it off D) Minimizing the cost of capital E) Keep liabilities at a minimum

D) Minimizing the cost of capital

Which of the following is NOT true regarding the capital budgeting process? A) Cash flows are negative at first B) Evaluation of discounted cash flows is necessary C) Companies should only invest in projects where the Return on Investment>Cost of Capital D) Negative NPV will always occur when initial cash flows are negative E) Strategic planning is usually the first step

D) Negative NPV will always occur when initial cash flows are negative

According to GAAP, which is an acceptable revenue recognition practice? A) Recognizing revenue on a long term contract when the contract is signed B) Recording loans as revenue C) Recognizing revenue when the customer is billed D) Recognizing revenue prior to cash from the customer being received E) Reporting one-time gains as revenue

D) Recognizing revenue prior to cash from the customer being received

Which activity is most likely to increase shareholder value? A. Minimizing the amount of projects the company spends money on B. Using only equity to finance the company's acquisitions C. Maximizing the cost of capital D. Allocating capital to investments with the highest risk-adjusted return E. Maximizing the amount of corporate assets

D. Allocating capital to investments with the highest risk-adjusted return

Which of the following is true regarding stockholders versus stakeholders? A. In a liquidation, stockholders are paid before stakeholders B. Gordon Gekko believes management should maximize value for all stakeholders C. Employees are considered stockholders but not stakeholders D. In a liquidation, stockholders are only paid if there is cash remaining after stakeholder contracts are fulfilled E. Stockholders are protected by contracts with the corporation

D. In a liquidation, stockholders are only paid if there is cash remaining after stakeholder contracts are fulfilled

Which one of the following is an element of the new corporate finance environment? A. Lower economic volatility B. Higher inflation C. Increase in indirect investment D. Institutionalization of markets E. Decrease in international trade

D. Institutionalization of markets

Which of the following is an example of the agency problem? A. Management makes an acquisition to increase the growth prospects for the company B. Management advocates increasing share buybacks to the Board of Directors C. Management lays off employees to cut costs in an economic downturn D. Management acquires a negative ROI investment in order to increase company revenues and executive compensation E. Management has stock options in the company, potentially providing large payouts if the company does well

D. Management acquires a negative ROI investment in order to increase company revenues and executive compensation

Which group has the residual claim in a company's cash flows? A. Employees B. Suppliers C. Lenders D. Stockholders E. Government

D. Stockholders

Which of the following statements regarding business organizational forms is true? A. Liability of owners is limited to their investment in a Partnership B. Owners of corporations are taxed on their share of profits, but there are no taxes on the business C. Corporations are easier to form than partnerships D. The primary advantage of a corporation is that it is relatively easy to raise capital E. Corporations have always been the dominant form of business organization

D. The primary advantage of a corporation is that it is relatively easy to raise capital

Which of the following statements are true regarding traditional and behavioral finance? A. According to Traditional finance, prices reflect the biases and emotions of investors B. Traditional finance assumes that investors are not always rational, but behavioral finance claims that all decisions makers will act to maximize utility C. According to Behavioral finance, decisions makers act in accordance with expected risk and return derived from an asset pricing model such as CAPM D. Traditional Finance proposes that investor behavior is rational and decisions maximize expected utility E. Traditional finance does not account for arbitrageurs. Arbitrage did not gain popularity until it was introduced by proponents of behavioral finance

D. Traditional Finance proposes that investor behavior is rational and decisions maximize expected utility

36 Which of the following ratios indicate the extent a company finances its operations with debt? A Activity ratios B Profitability ratios C Liquidity ratios D Efficiency ratios E Leverage ratios

E Leverage ratios

22 Which of the following is true about Bernie Madoff? A Madoff's investment scam lasted only several months B Unlike Charles Ponzi, Madoff promised very high investment returns C Madoff's fraud pre-dated the scheme run by Charles Ponzi D The Securities and Exchange Commission discovered Madoff's investment E Schemes like Madoff's require new investment dollars on an ongoing basis to continue

E Schemes like Madoff's require new investment dollars on an ongoing basis to continue

29 Which of the following is true? A The average annual return on the stock market is about 20% B The average growth rate in the U.S. is 12% C On average, companies earn a return on equity of 25% in the U.S. D The price of an ounce of gold is $50,000 E The Dow Jones Industrial Average currently trades at about 16,000

E The Dow Jones Industrial Average currently trades at about 16,000

In just 45 days, Charles Ponzi promised his investors a return of ________ A) 80% B) 100% C) 25% D) 10% E) 50%

E) 50%

A cash conversion cycle of 40 days implies: A) The difference between days sales outstanding and days payable outstanding is 40 days B) It takes 40 days from the purchase of inventory to receive cash customers C) Cash is received from customers before suppliers are paid D) It takes 40 days from the time of sale to receive cash from customers E) After suppliers are paid, it is 40 days until cash is received from customers

E) After suppliers are paid, it is 40 days until cash is received from customers

According to the principals of finance, in the long-run stock prices are driven by A) Macroeconomic Conditions B) Interest Rates C) Valuation D) Supply & Demand E) Corporate earnings

E) Corporate earnings

Which of the following was NOT part of Sarbanes-Oxley? A) Companies cannot make loans to outside directors B) Audit committees must be composed of outside directors C) Management is accountable for accuracy of financial statements D) CEOs must sign off on financial statements E) Deregulation of financial systems

E) Deregulation of financial systems

Why is the yield on 30-year Treasury bonds important? A) It represents the base-level cost of capital in the US B) It reflects Federal Reserve fiscal policy C) It indicates whether the US government has a balanced budget D) It indicates how much the Treasury has borrowed E) It is the fear index for the US markets

E) It is the fear index for the US markets

Capital structure management is managing a company's A) Outstanding market value B) Corporate strategy C) Inventory turnover D) Current assets and liabilities E) Mix between debt and equity financing

E) Mix between debt and equity financing

The difference between the operating cycle and the cash conversion cycle is that: A) There is no difference B) The operating cycle is shorter than the cash conversion cycle C) The operating cycle subtracts accounts for supplier financing D) The operating cycle does not consider inventory E) The cash conversion cycle accounts for supplier financing

E) The cash conversion cycle accounts for supplier financing

Making sales to a customer on credit is an example of a ________ decision, and would be the responsibility of the __________. A) Working Capital; Controller B) Capital Structure; Controller C) Capital Budgeting; Treasurer D) Capital Structure; Treasurer E) Working Capital; Treasurer

E) Working Capital; Treasurer

Which of the following is true of financial crises? A. Stock returns are low leading to a crisis B. Crises typically only occur once every 75 - 100 years C. Government's rarely get involved D. Crises are a recent phenomenon and did not occur prior to 1900 E. Crises usually involve easy financing

E. Crises usually involve easy financing

Which of the following is an advantage of the Corporate Organizational Form? A. Double taxation B. Ease of formation C. Profits are taxed only as income D. High level of liability E. Easy to raise capital

E. Easy to raise capital

Which of the following is one of the three primary areas of finance? A. Global Finance B. Corporate Governance C. Audit & Assurance D. Financial Accounting E. Investments

E. Investments

Which of the following is part of the controller's function? A. Determining the feasibility of various projects B. Financial planning C. Managing short and long term capital requirements D. Working capital management E. Preparing financial statements and reports

E. Preparing financial statements and reports

Which financial ratios are used to determine management's effectiveness at creating shareholder value? A. Net Profit & Interest Expense B. Net Profit & Cost of Capital C. Return on Investment & Interest Expense D. Sales & Cost of Capital E. Return on Investment & Cost of Capital

E. Return on Investment & Cost of Capital

Which of the following is true? A) Current liabilities are expected to be settled in the next 90 days B) Earnings = cash flow C) PP&E is an asset D) Book value and market value are equivalent E) Liabilities = Equity

PP&E is an asset

an individual or group that purchases large numbers of a public companys shares

activist investors

1. Which of the following concerning the relationship between risk and return is correct? A. A risk averse investor would prefer a stock with an expected 10% return and a standard deviation of 20% to a stock with an expected return of 10% with a standard deviation of 10% B. Investors generally demand higher return for less risky investments C. Riskier investments tend to have higher returns D. Safer investments historically provide the highest returns E. A risk taking investor would prefer a stock with an expected 10% return and a standard deviation of 10% to a stock with an expected return of 10% with a standard deviation of 20%

Riskier investments tend to have higher returns

Forceful and intentional choice and application of accounting principles done in an effort to achieve desired results refers to which financial numbers game? A) None of the above B) Earnings management C) Aggressive accounting D) Income smoothing E) Fraudulent financial reporting

aggressive accounting

Which of the following are ways to spot earnings mismanagement? A) Sudden changes in reserves B) Earnings growth is too consistent C) All of the above D) Earnings don't correlate with cash flows E) Earnings deviate from its peer group

all of the above

Which of the following enhances shareholder value? A) A company raises their return on equity B) All of the above C) A company is able to expand their profit margins D) A company experiences strong revenue growth E) A company increases their market share in their product industry

all of the above

-primarily minority shareholders -board of directors elected to represent shareholders interests -fluid capital model

anglo-american model

Which of the following duties do NOT fall under the CFO's role as Treasurer? A) None of the above B) Capital Budgets C) Financial Planning D) Short-Term Capital Requirements E) Audits

audits

Where do capitalized expenses go? A) Cash B) Retained Earnings C) Balance Sheet D) Cash Flow Statement E) Income statement

balance sheet

Which of the following statements reflect a company's financials at a specific point in time? A) All of the Above B) Income Statement C) Balance Sheet D) Statement of Cash Flows

balance sheet

financial statement that summarizes a companys assets, liabilities, and shareholders equity at a specific point in time

balance sheet

where are deferred taxes carried?

balance sheet

involves studying the effects os psychological, social, cognitive, and emotional factors on economic decisions

behavioral finance

primarily concerned with the bounds of rationality of economic agents

behavioral finance

Which company has the longest operating cycle? A) Boeing B) Nike C) McDonald's D) Chipotle Mexican Grill E) Adidas

beoing

the process of planning and managing a firms long term investment projects and ventures

capital budgeting

the valuation, planning, and managing of corporate investments for a firm

capital budgeting

financial markets where issuers and investors buy and sell debt and equity securities

capital markets

managing financing mix between debt and equity

capital structure

minimizing the cost of capital by using the right mix of debt and equity

capital structure

-the head accountant of the firm -responsible for maintaining the companys books and financial statements

controller

Which of the following CFO roles pertain to the Accounting department? A) Vice President of Production B) Chief Operating Officer C) Cash Managers D) None of the above E) Controller

controller

planning and control, systems, financial statements and reports, taxes, budgets

controller functions

involves how companies raise and invest money and manage their financial resources

corporate finance

the system of rules, practices, and processes by which a company is directed and controlled

corporate governance

a legal entity which serves as a nexus of contracts

corporation

describe the organizational form: -difficult to form -double taxes

corporation

describe the organizational form: -limited liability -good ability to raise capital -easy to transfer

corporation

Which of the following accounts is not on the balance sheet? A) Accounts Payable B) Inventory C) Property, Plant, and Equipment D) Cost of Goods Sold

cost of goods sold

when threatened with a takeover attempt, the target company may sell off some of its most desirable assets

crown jewels

What is the world's largest market? A) Commodities B) Stocks C) Bonds D) Gold E) Currencies

currencies

Working capital management requires monitoring the difference between Current Assets and ___________ A) Total Debt B) Capital Expenditures C) Current Liabilities D) Inventory E) Shareholder's Equity

current liabilities

Which statement is the most accurate reflection of the agency problem? a. Management pursues strategies that maximize shareholder value b. The objectives of shareholders and management are aligned c. Management allocates corporate resources in a way that benefits stockholders d. Management does not have an ownership stake in the company e. The management has stock options in the company.

d. Management does not have an ownership stake in the company

According to the principles of finance, diversification does what to the risk of an investment portfolio? A) Decreases B) Has no effect C) Increases

decreases

Net Fixed Assets on the balance sheet are net of which of the following items? A) Operating expenses B) COGS C) Depreciation D) SG&A E) Transaction costs

depreciation

Which of the following accounts is not on the income statement? A) Net Income B) Dividends C) EBIT D) Revenue

dividends

Which is typically the largest liability on household balance sheets? A) Student Loans B) Credit Cards C) Business debt D) Home mortgage E) Auto loans

home mortgage

Which of the following is true about Asset Diversification? a. It is necessary to invest in at least 500 assets to achieve significant risk reduction b. It is a way of selecting the highest growth stocks in a portfolio c. It involves allocating 100% of investments in the same industry d. It is a method of calculating expected return on an asset e. It is used to reduce exposure to firm-specific risk

e. It is used to reduce exposure to firm-specific risk

Which is true about the income statement? A) Expenses are matched to revenues B) Revenues are matched to expenses C) SG&A expense and Cost of Goods Sold the same D) Depreciation is a cash expense E) Revenue = net income

expenses are matched to revenues

A software company may record the full value of its revenues for a three year contract as soon as the contract with the customer is signed. A) True B) False

false

Activist investors usually have a negative effect on a company's financial performance. A) True B) False

false

Booking one time gains below the operating line is illegal. A) True B) False

false

R&D costs are tangible items and go on the balance sheet. A) True B) False

false

The new environment of corporate finance is characterized by an increase in global regulation. A) True B) False

false

True or False: A company should capitalize advertising expenses if they are expected to produce long term benefits. A) True B) False

false

True or False: A company should recognize revenue when it bills the customer, not when goods are actually shipped. A) True B) False

false

True or False: Changes in current assets and current liabilities are an adjustment to financing activities. A) True B) False

false

True or False: Companies are managed according to the interest of the majority owner in the Japanese model of Corporate Governance. A) True B) False

false

True or False: Companies want to have the lowest possible Days Payable Outstanding because it shows their vendors that they are eager to pay their bills. A) True B) False

false

True or False: Dividends paid on equity are tax deductible and result in a tax shield effect of equity.

false

True or False: Fraud occurred mostly in the United States and is very uncommon internationally. A) True B) False

false

True or False: Goodwill is related to good relations with stakeholders. A) True B) False

false

True or False: If a company splits its stock, the firm's value will go down.

false

True or False: In general, account values are recorded as market values on the balance sheet. A) True B) False

false

True or False: In the new paradigm of working capital management, companies believe that holding excess inventory adds value to customers. A) True B) False

false

True or False: Shortage costs increase as current assets increase. A) True B) False

false

True or False: The cash conversion cycle measures the time between inventory being purchased and collection of payments from customers.

false

True or False: The dividend yield measures what percentage of a company's earnings are paid in dividends.

false

True or False: Working capital management decisions are associated with the long term assets of the company.

false

True or false: In Gordan Gekko's "Greed is Good" speech, Gekko is arguing that management has made decisions that have been beneficial to shareholder value A) True B) False

false

true or false: the random walk hypothesis is inconsistent with the efficient market hypothesis

false

the management of money

finance

measures risk focusing on financing mix

financial leverage

what is a disadvantage of using debt to raise capital?

fixed obligation

Which would be a red flag if you were looking for misstated earnings? A) Consistent profit margins B) Earnings consistent with cash flows C) Frequent one-time charges or gains D) Volatility of revenues E) High Account Receivable balances

frequent one time charges or gains

___________ drive prices in the long run

fundamentals

Which Country's Corporate Governance model is best described as a dedicated capital model? A) China B) U.S. C) Brazil D) Canada E) Germany

germany

provide compensation to top-level executives in the event of a change in corporate control

golden parachutes

A form of earnings management designed to remove peaks and valleys from a normal earnings series, including steps to reduce and "store" profits during refers to A) Earnings management B) Income smoothing C) Aggressive accounting D) Fraudulent financial reporting E) Creative accounting practices

income smoothing

Which of the following numbers games would make a company's revenues look less volatile? A) Aggressive interpretations of GAAP B) Fraudulent Activity C) Recording loans as revenue D) Capitalizing expenses E) Income Smoothing

income smoothing

financial report that summarizes revenues and expenses and showing net profit/loss in a specified accounting period

income statement

reports for a certain interval, the net assets generated through businesses operations (revenues), the net assets consumed(expenses) and the net income

income statement

The primary business of Warren Buffet's Berkshire Hathaway is: A) Consumer Goods B) Real Estate C) Insurance D) Banking

insurance

what is an advantage of using debt to raise capital?

interest is tax deductible

what are the primary uses of cash flows?

investments in PP&E

-large equity holders provide oversight -very few takeovers

japan-germnany

measures a firms ability to meet short term obligations

liquidity

what is the goal of capital budgeting?

make long-term investments that offer the highest risk-adjusted returns

corporate managers should make decisions that ...

maximize shareholder value

According to the principles of finance, what should be management's goal when making corporate decisions? A) Maximizing the CEO's Christmas Bonus B) Maximizing Shareholder Value C) Growth D) None of the above

maximizing shareholder value

what is the goal of working capital management?

minimize the use of short term capital

Which of the following is not a type of business organization? A) Corporation B) Monopoly C) None of the above D) Partnership E) Sole proprietorship

monopoly

what are the advantages of using equity to raise capital?

none -- fixed obligation

Which is not an important thing to know about the statement of cash flows? A) There are three primary sources and uses of cash B) The primary source of cash is operating activities C) None of the above D) The primary use of cash is investing activities E) Cash inflows and outflows are balanced by financing activities

none of the above

corporate governance battles often result from companies ...

not being managed to the interests of owners

what is the primary source of cash flows?

operation (net income + depreciation)

a corporate defense mechanism characterized by a firm making a counter-takeover bid for the aggressor

pac man

using this strategy, the target company employs a counter-takeover bid for the aggressor

pac-man defense

describe the organization form: -more difficult to form -profits taxed as income -more difficult to transfer -liable for liabilities -difficult to raise capital

partnership

what are the disadvantages of using equity to raise capital?

payments to equity holders are not tax deductible

used to make a stock unappealing to others by making a takeover extremely expensive

poison pills

a fraud in which invested money is pocked by the schemer and investors are paid out of proceeds from new investors

ponzi scheme

a ________ relationship exists between risk and expected return

positive

Which is typically the largest asset on household balance sheets? A) Savings account B) Primary Residence C) Mutual Funds D) Ferraris and Porsches E) 401K

primary residence

reports for a certain interval, the amount of cash generated and consumed by a company through operating, financing, and investing activities

statement of cashflows

Who is Danny Devito talking to in Other People's Money? A) Stockholders B) Stakeholders

stockholders

have a residual claim on the firms cash flows

stockholders

Which is the primary reason that corporations are the most prevalent organization form? A) The limited tax liability B) The ability to raise capital C) Anyone can form a corporation D) Beneficial corporate governance features E) None of the above

the ability to raise capital

Orren Hari was an advocate of what approach to managing a company? A) The cash control approach B) The value approach C) The shareholder value approach D) The stakeholder approach E) The efficiency approach

the stakeholder approach

when a target company finds a friendly merger candidate

the white knight

Which of the following is NOT a characteristic of a corporation A) They are easily formed B) They are double taxed C) Ownership is easily transferable D) They carry limited liability E) They can raise capital with relative ease

they are easily formed

What is true of stockholders? A) They have a residual claim on the firm's cash flows B) They are protected by contracts C) Management teams are almost never stockholders D) They are paid before the stakeholders of a corporation E) They can be anyone who has an economic interest in the corporation

they have a residual claim on the firms cash flows

how does the statement of cash flows stay in balance?

through financing

in charge of managing the companys cash

treasurer

cash and working capital management, capital budgets, long term financial planning

treasury functions

A company's earnings should correlate with its cash flows A) True B) False

true

Great companies do not always make great stocks. A) True B) False

true

Inflation decreases your return on investment by reducing the future value of the money you receive on your investment A) True B) False

true

Sarbanes-Oxley was an early 2000's solution for corporate governance that increased investor confidence in financial statements following several high profile, accounting scandals. A) True B) False

true

The level of a company's capital expenditures tend to follow the trend of the economy over time. A) True B) False

true

True or False: Amongst other reasons, the 2008 financial crisis was caused by lenient regulation and government oversight, as well as excessive leverage and poor risk management on Wall Street. A) True B) False

true

True or False: Capital budgeting is when companies manage their investments in long-term assets: A) True B) False

true

True or False: Corporations are exposed to higher potential agency costs due to the possibility of managers not acting in the interest of shareholders and instead paying themselves higher bonuses and making large and potentially detrimental acquisitions. A) True B) False

true

True or False: Decreasing dividends sends a negative signal to the market

true

True or False: Deferred taxes are a result of different depreciation methods for GAAP and tax reporting. A) True B) False

true

True or False: Grocery stores have higher total asset turnover than electric utilities.

true

True or False: In addition to overseeing the functions of the Treasurer and Controller, the CFO hedges risks and insures that capital is available to fund strategic plans. A) True B) False

true

True or False: In the Anglo-American governance model, the Board of Directors is elected to represent shareholder interests. A) True B) False

true

True or False: Misstatements in the financial statements are typically a result of a company trying to meet Wall Street's expectation A) True B) False

true

True or False: The change in corporate governance gave the shareholders and Board more influence in the company's decision making and ability to reward or punish CEOs based on their performance. A) True B) False

true

True or False: Under the Sarbanes-Oxley Act of 2002, management is directly accountable for the accuracy of the financial statements provided to investors. A) True B) False

true

true or false: Investors believe that transaction costs, taxes, and inflation are the enemy because when it is all said and done, they reduce the return on your investments

true

If biotechnology stocks and utility stocks both provide the same expected return, then which would you invest in? (Hint: biotechnology companies are much riskier than utility companies because most of the time the entire company revolves around a single drug that has not yet been approved) A) Utility Stock B) Biotechnology Stock

utility stock

Which company has the largest R&D budget? A) Apple B) Dell C) Microsoft D) Volkswagen E) Samsung

volkswagen

What is/are the biggest cost(s) associated with holding inventory? A) None of the Above B) Spoilage and Obsolescence C) Warehousing and Capital D) Computer and Financial Systems to Monitor Inventory E) Insurance

warehousing and capital

when a different company saves a company from a takeover

white knight

managing short term financial position of the firm

working capital management

managing the firms short term assets and liabilities

working capital management