Finance 301 Exam 1

Inventories

Which of the following assets classes is generally considered to be the least liquid?

Companies with high research hand development (R&D) expenses tend to have high P/E ratios.

Which of the following statements is TRUE about market value ratios? Companies with high research hand development (R&D) expenses tend to have high P/E ratios. Companies with high research hand development (R&D) expenses tend to have low P/E ratios.

True

Market-value or market based ratios help analysts figure out what investors and the markets think about the firm's growth prospects of current and future operation performance.

13.37x

One year late FB's shares are trading at $49.60 per share, and the company reports the value of its total common equity as $27,825,000. Given this information, FB's market-to-book ratio is ________.

Yes

Can a company's shares exhibit a negative P/E ratio?

True

A company exhibiting a high liquidity ratio means it is likely to have enough resources to pay off its short-term obligations.

Maximize; Common Stock

According to finance theory firms should attempt to ________ the long-term price of the firm's ______. The benefit to this objective is that it provides the best financial outcome for the firm's share holders.

Project Y, with 40% ROE and a small investment, generating low expected cash flows.

Based on your understanding of the uses and limitations of ROE, which of the following projects will a manager likely choose if his or her bones is solely based on the ROE of the next project? Project X, with 35% ROE and a large investment, generating high expected cash flows. Project Y, with 40% ROE and a small investment, generating low expected cash flows.

Company A

Companies have the opportunity to use varying amounts of different sources of financing to acquire their assets, including internal and external sources, and debt (borrowed) and equity funds. Company A uses long-term debt to finance its assets and Company B uses capital generated from shareholders to finance its assets. Which company would be considered a financially leveraged firm? Company A Company B

False

Debt or financial leverage ratios help analysts determine whether a company has sufficient cash to repay its short-term debt obligations.

27.40x

Franklin Aerospace has a quick ratio of 2.00x, $32,850 in cash, $18,250 in A/R, some inventory, total current assets of $73,000, and total liabilities of $25,550. The company reported annual sales of $600,000 in the most recent annual report. Over the past year, how often did Franklin Aerospace sell and replace its inventory? (HINT: Inventory Turnover Eq.)

$18.55 per share

Fuzzy Button Clothing Company just reported earnings after tax (Net Income) of $8.5 Million, and a current stock price of $20.25 per share. The company is forecasting an increase of 25% for its after-tax income next year, but it also expects it will have to issue 2 million new shares of stock (raising its shares outstanding from 5.5 million to 7.5 million. If FB forecast turns out to be correct and its price-to-earnings (P/E) ratio does not change, what does the company's management expect

Finance

It addresses how money is raised and used by individuals, businesses, and governments.

Different firms may use different accounting practices. A firm may operate in multiple industries.

Ratio analysis is an important component of evaluating company performance. It can provide great insights into how a company matches up against itself over time and against other players within the industry. However, like many tools and techniques, ratio analysis has a few limitations and weaknesses. Which of the following statements represent a weakness or limitation of ratio analysis? (2) A firm's financial statements show only one period of financial data. Different firms may use different accounting practices. A firm may operate in multiple industries.

Capital Budgeting

The Chief Financial Officer in a company is responsible for which of the following departments? Administration Marketing Capital Budgeting Human Resources

Double Taxation of Dividends

The US Internal Revenue Service taxes the taxable income of corporations as well as the taxable investment income of the firms' shareholders

Encourages

The US tax structure influences a firm's willingness to finance with debt. The tax structure (encourages/ discourages) more debt?

A current ratio of 1 indicates that the book value of the company's current assets is equal to the book value of its current liabilities. An increase in the quick ratio over time usually means that the company's liquidity position is improving and that the company is managing its short-term assets well.

Which of the following statements is true? (2) A current ratio of 1 indicates that the book value of the company's current assets is equal to the book value of its current liabilities. An increase in the quick ratio over time usually means that the company's liquidity position is improving and that the company is managing its short-term assets well. An increase in the current ratio over time always means that the company's liquidity position is improving.

More

You decide also to conduct a qualitative analysis based on the factors summarized by the American Association of Individual Investors (AAII). According to your understanding, a company with one key product is considered to be (more/less) risky than companies with a wide range of products.

True

One possible explanation for an increase in a firm's profitability ratios over a certain time span is that the company's income has increased.

Sometimes

An increase in ROE would (never/sometimes/ always) imply an increase in shareholder wealth.

Limited Liability

This benefit is conferred by the corporate form of organization in which an investor's personal responsibility for the debts of the business are limited to the amount the investor has invested in the firm.

Business Ethics

This code of behavior specifies how the firm and its employees will treat employees and stakeholders.

Treasurer

This corporate officer is responsible for managing the firm's cash and short-term investments, pension fund, and risks.

Limited Partner

This is a participant in a partnership, whose personal assets may no be seized to satisfy the debts of the partnership.

Value

This is the worth of a good or service as established by the discounted and current value of the item's cash flows.

Corporation

This state-created entity is authorized to conduct business and offer its owners an investment with an unlimited life.

Shareholder Wealth Maximization

This term describes the individuals and groups whose needs and wants should be identified and addressed in order to generate higher returns for the firm and ensure its viability.

True

Asset management or activity ratios provide insights into management's efficiency in using a firm's working capital and long-term assets.

Franklin Aerospace is holding less inventory per dollar of sales compared to the industry average.

The inventory turnover ratio across companies in the aerospace industry is 23.29x. Based on this information, which of the following statements is true for Franklin Aerospace? Franklin Aerospace is holding more inventory per dollar of sales compared to the industry average. Franklin Aerospace is holding less inventory per dollar of sales compared to the industry average.

If a company has a profit margin of 10%, it means that the company earned a net income of $0.10 for each dollar of sales. If a company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes.

Decision makers and analysts look deeply into profitability ratios to identify trends in a company's profitability. Profitability ratios give insights into both the survivability of a company and the benefits that shareholders receive. Identify which of the following statements are true about profitability ratios? An increase in a company's earnings means that the profit margin is increasing. If a company has a profit margin of 10%, it means that the company earned a net income of $0.10 for each dollar of sales. If a company's operating margin increases but its profit margin decreases, it could mean that the company paid more in interest or taxes. If a company issues new common shares but its net income does not increase, return on common equity will increase.

$10,300

To expand her portfolio, Piper recently purchased 400 shares of common stock in the Sanger Machine Company. The current market price of Sanger's common stock is $25.75 per share. Piper's total wealth from her investment in Sanger Machine Company is $_______

Under economic growth conditions, firms with relatively more leverage will have higher expected returns.

Which of the following is TRUE about the leveraging effect? Under economic growth conditions, firms with relatively more leverage will have higher expected returns. Under economic growth conditions, firms with relatively low leverage will have higher expected returns.

The analysis likely includes incorrect statements and misleading conclusions.

You work as an analyst at a credit-rating agency, and you are comparing firms in the construction and engineering sector. One company in the portfolio of companies you are analyzing is a Chinese firm. THis firm stands out in the ratio analysis, because the company's financial ratios are substantially lower than the identical financial ratios of the other firms in the sector. You do not dissect the results of the ratio analysis and categorize report this firm as an under-performing company. Which of the following statements about your analysis is report is TRUE? The analysis likely include incorrect and misleading conclusions The ratios provide an accurate and thorough representation of the Chinese company's performance.