Finance test 1

"If equivalent investment opportunities trade simultaneously in different competitive markets, then they must trade for the same price in both markets." What do we call the above statement? A) the Net Present Value rule B) the Law of One Price C) the Valuation Principle D) the time value of money

B

A 30-year mortgage loan is a A) Long-Term Liability. B) Current Liability. C) Current Asset. D) Long-Term Asset.

A

A factory owner wants his workers to produce as many widgets as they can, so he pays his workers based on how many widgets they produce. However, in order to make sure that the workers do not rush and produce a large number of poorly made widgets, he checks the widgets at random at various stages of their manufacture. If a defect is found in a widget, the pay of the entire section of the factory responsible for that defect is docked. How is this factory owner seeking to solve the agency conflict problem in this case? A) by supplying incentives so the agents act in the way principal desires B) by ensuring that all workers co-operate to maximize the gains of their section C) by making the agents into principals themselves D) by maximizing the information that the principal obtains about the behavior of the agents

A

A firm that provides tax services to the public intends to offer a premium tax-return service at a higher price than their current services. The managers of the company ask experts in marketing to determine how much an effective ad campaign for such a service would cost, and by how much sales would be increased. They consult experts in economics to calculate the increases in revenue from the success of the campaign, experts in operations to determine the cost of offering the service, and experts in strategy to anticipate possible counter-moves by competitors. This example illustrates which of the following points about the role of financial managers? A) Real-world decisions are complex and require information from many sources if the decisions are to be valid. B) Determining the costs associated with making a decision is easier than determining the potential benefits of the decision. C) All of the costs and benefits associated with a decision can never be fully identified. D) Ultimately the decision whether to take a certain course of action rests with the financial managers of a company.

A

A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle production plant. How will the cost to the company of this piece of equipment be recorded? A) It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows. B) It will be depreciated over time on the income statement and subtracted as Inventory on the statement of cash flows. C) It will be depreciated over time on the income statement and therefore not be recorded separately on the statement of cash flows. D) It will be subtracted from Gross Profit on the income statement and therefore not be recorded separately on the statement of cash flows.

A

A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company are most likely to be true? A) Since net working capital is negative, the company will not have enough funds to meet its obligations. B) Since net working capital is high, the company will likely have little difficulty meeting its obligations. C) Since net working capital is very high, the company will have ample money to invest after it meets its obligations. D) Since net working capital is nearly zero, the company is well run and will have little difficulty attracting investors.

A

A sole proprietorship is owned by A) one person. B) two or more persons. C) shareholders. D) bankers.

A

Company A has current assets of $42 billion and current liabilities of $31 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information? A) Company A is less likely than Company B to have sufficient working capital to meet its short-term needs. B) Company A has greater leverage than Company B. C) Company A has less leverage than Company B. D) Company A and Company B have roughly equivalent enterprise values.

A

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in the balance sheet between 2007 and 2008? A) The company is having difficulties selling its product. B) The company has reduced its debt. C) The company has added a major new asset in terms of plant and equipment. D) The company has experienced a significant rise in its market value.

A

In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops. If sales in 2008 and 2009 were steady at $25 million, but the gross margin increased from 2.3% to 3.4% between those years, by what amount was the cost of sales reduced? A) $275,000 B) $325,000 C) $425,000 D) $575,000

A

On August 19, 2004 Google IPO offered 19,605,052 shares at a price of U.S. $85 per share, which were sold in an online auction in a bid to make the shares more widely available. Which of the following statements best describes why these are considered a primary market transaction? A) The transaction was between the corporation and investors. B) Shares of Google from this time onward could be traded between investors on a stock exchange. C) The shares were the first to be publicly issued by Google. D) Google was at the time a recently founded company seeking capital with which to expand.

A

Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 at the end of each of the next five years. Steve concludes that in five years time he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steve's major error in reasoning when making this decision? A) Costs and benefits must be in the same terms to be compared. B) There may be other investments that he can make that will offer even bigger benefits. C) The investment may have hidden costs that will reduce the amount of benefit he receives. D) The value of the cash he has today is greater than the value of the cash he may have in the future.

A

The balance sheet and income statement of a particular firm are shown above. What does the account receivable days' ratio tell you about this company? A) It takes on average about 4 weeks to collect payment from its customers. B) It takes on average about 6 weeks to collect payment from its customers. C) It takes on average about 7 weeks to collect payment from its customers. D) It takes on average about 11 weeks to collect payment from its customers.

A

What is the bid-ask spread? A) the difference in price available for an immediate sale of a stock and the immediate purchase of that stock B) all of the costs and fees that a stock exchange charges in order to process a transaction C) the rise or fall in the value of a stock between the time it is acquired by an investor and sold by that investor D) the difference in the selling price of a stock between different exchanges

A

What is the main problem in using a balance sheet to provide an accurate assessment of the value of a company's equity? A) Valuable assets such as the company's reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet. B) The balance sheet does not accurately represent the book value of assets held by the company. C) The equity shown on the balance sheet does not reflect the market capitalization of the company. D) Knowing at a single point in time what assets a firm possesses and the liabilities a firm owes does not give any indication of what those assets can produce in the future.

A

What is the most common type of firm in the United States and the world? A) sole proprietorships B) partnerships C) limited partnerships D) corporations

A

What is the most common way that agency conflict problems are addressed in most corporations? A) by minimizing the number of decisions that a manager makes where there is a conflict between the managers interests and those of the shareholders B) by terminating the employment of employees who are found to have put their own interests above that of the company's C) by using disinterested outside bodies to adjudicate between managers and shareholders when such conflicts arise D) by prosecuting managers who have been found to have illegally used company moneys for their own benefit

A

Which of the following best explains why you cannot use the price of rolled oats at a local supermarket as the competitive market value of rolled oats? A) You can buy the oats at the price posted by the store, but the store will not buy oats from you for the same price. B) The posted prices of oats can vary widely between grocery stores, even within the same local area. C) Grocery stores mark up the prices of their oats up to make a profit. D) Grocery stores typically sell oats in different packaging, which results in different prices within the same store.

A

Which of the following firms would be expected to have a high ROE based on that firm's high profitability? A) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals B) a low-end retailer that has a low mark-up on all items it sells C) a brokerage firm that has high levels of leverage D) a grocery store chain that has very high turnover, selling many multiples of their assets per year

A

Which of the following is not an operating expense? A) interest expense B) depreciation and amortization C) selling, general, and administrative expenses D) research and development

A

Which of the following statements is FALSE? A) Finding the present value (PV) and compounding are the same. B) A dollar today and a dollar in one year are not equivalent. C) If you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash flows into the same units or move them to the same point in time. D) The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money.

A

Which of the following statements regarding the income statement is INCORRECT? A) The income statement shows the earnings and expenses at a given point in time. B) The income statement shows the flow of earnings and expenses generated by the firm between two dates. C) The last or "bottom" line of the income statement shows the firm's net income. D) The first line of an income statement lists the revenues from the sales of products or services.

A

Which of the following types of firms do not have limited liability? A) sole proprietorships B) limited partnerships C) corporations D) none of the above

A

Which of the following would be best considered to be an agency conflict problem in the behavior of the following financial managers? A) Bill chooses to pursue a risky investment for the company's funds, because his compensation will substantially rise if it succeeds. B) Sue instructs her staff to skip safety inspections in one of the company's factories, knowing that it will likely fail the inspection and incur significant costs to fix. C) James ignores an opportunity for his company to invest in a new drug to fight Alzheimer's disease, judging the drug's chances of succeeding as low. D) Michael chooses to enhance his firm's reputation at some cost to its shareholders by sponsoring a team of athletes for the Special Olympics.

A

Which of the following would be more typically the responsibility of a controller rather than a treasurer? A) overseeing accounting and tax functions B) capital budgeting C) managing credit D) making investment decisions

A

Which of the stock markets listed below is the smallest, as judged by trading volume? A) Deutsche Börse B) London Stock Exchange C) NASDAQ D) NYSE Euronext (US)

A

Which ratio would you use to measure the financial health of a firm by assessing that firm's leverage? A) debt-equity or equity multiplier ratio B) market-to-book ratio C) market debt-equity ratio D) current or quick ratio

A

Whose interests should a financial manager consider paramount when making a decision? A) the stockholders who have risked their money to become owners of the company B) the employees and associated stakeholders who are employed by the company C) the public who consume the company's goods and services D) the senior management and associated colleagues at the executive level within the company

A

You are scheduled to receive $10,000 in one year. An increase in the interest rate will have what effect on the present value of this cash flow? A) It will cause the present value to fall. B) It will cause the present value to rise. C) It will have no effect on the present value. D) The effect cannot be determined with the information provided.

A

You see on Craigslist that a used XBOX 360 sells for $100 and a new XBOX 360 sells for $300. Is this an arbitrage opportunity? A) No., because the market for a used XBOX 360 is not the same as the market for a new XBOX 360. B) No, because the market for a used XBOX 360 is a competitive market. C) Yes, because the market for a used XBOX 360 is a competitive market. D) Yes, because the market for a used XBOX 360 is not the same as the market for a new XBOX 360.

A

A coin collector treasures his 1969-S Lincoln cent with a doubled die obverse because he found it in his pocket change, rather than purchasing it. He can sell it on the open market for $35,000, but would only sell it for at least twice that price, due to its sentimental value to him. It is anticipated that the coin will increase in market value in the foreseeable future. What is the value of the coin? A) $0.01, since he paid nothing to obtain the coin and it has a face value of one cent. B) $35,000, since this is the price that the coin would fetch on the open market. C) At least $35,000, since he could replace the coin for $35,000, but the coin he owns has additional intangible value due to its sentimental value. D) At least $35,000, since the value of the coin will increase in the future.

B

A company that produces racing motorbikes has several models that sell well within the motorcycle racing community and which are very profitable for the company. Despite having a profitable product, why must this company take care to ensure that it has sufficient cash on hand to meet its obligations? A) Profits from the sales of popular models will be lost when returned to the shareholders in the form of dividends. B) New models will require a lot of money to develop and bring to market before they generate any revenue. C) The company will have built up debts which must be repaid in order to bring the current models to market. D) Equity must be raised to finance the development of new models to replace the existing models.

B

A company's board of directors chooses to provide a comprehensive health care plan for the families of all employees, despite the large cost. They argue that this will not only increase the number of employees who stay with the firm, and thus reduce some costs involved in employee turnover, but also increase the employees' diligence and industry. What general principle is being argued by the board of directors? A) In a conflict between stakeholders in a company, the most important stakeholder is not always the stockholders. B) Some activities that decrease shareholders' wealth may have intangible benefits which increase the strength of the company overall. C) When a conflict of interest arises between shareholders and other stakeholders, in general, the correct solution is the one that creates the greatest good for the greatest number of stakeholders. D) Ethical decisions should be assessed on their moral value, not on their value in dollars and cents.

B

A corporate raider gains a controlling fraction of the shares of a poorly managed company and replaces the board of directors. How does the corporate raider hope to make a profit in this case? A) by the sale of the assets held by the company that hold most of its value B) by the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors C) by motivating the board of directors and other stakeholders in the company to make difficult short-term decisions that will increase the long-term viability of the company D) by removing the employees expectations of the continued poor performance of the company

B

A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet? A) the depreciation over the last year in the value of the vehicles owned by the company B) revenue received for the delivery of items that have not yet been delivered C) a loan which must paid back in two years' time D) prepaid rent on the offices occupied by the company

B

A limited liability company is essentially A) a limited partnership without limited partners. B) a limited partnership without a general partner. C) just another name for a limited partnership. D) just another name for a corporation.

B

A printing company prints a brochure for a client, and then bills them for this service. At the time the printing company's financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded? A) The sale will be added to Net Income on the income statement and retained in Net Income on the statement of cash flows. B) The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows. C) The sale will not be added to Net Income on the income statement but added to Net Income on the statement of cash flows. D) The sale will neither be added to Net Income on the income statement nor used to adjust Net Income on the statement of cash flows.

B

A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company? A) Investors may consider this firm to be a growth company. B) Investors believe the company's assets are not likely to be profitable its market value is worth less than its book value. C) The firm's market value is more than its book value. D) The value of the firm's assets are greater than their liquidation value.

B

A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows? A) as an outflow under Operating Activities B) as an outflow under Investment Activities C) as an outflow under Financial Activities D) The acquisition would not be recorded on the statement of cash flows.

B

Above are portions of the balance sheet and income statement for two companies in 2008. Based upon this information, which of the following statements is most likely to be true? A) Asset turnover ratios indicate that firm A is generating greater revenue per dollar of assets than firm B. B) Fixed asset turnover ratios indicate that firm A generating fewer sales for the assets they employ than firm B. C) Both asset turnover ratios and fixed asset turnover ratios indicate that firm A is generating greater revenue per dollar of assets than firm B. D) Fixed asset turnover ratios indicate that firm A generating more sales for the assets they employ than firm B.

B

Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows? A) It would be an expense on the income statement, so it would be reflected in operating cash flows. B) It would be an addition to property, plant and equipment, so it would be an investing activity. C) It would be an addition to cash, so would be reflected in the change in cash. D) None of the above answers is correct.

B

Cash is a A) Long-Term Asset. B) Current Asset. C) Current Liability. D) Long-Term Liability.

B

In most corporations, to whom does the chief financial officer report? A) the shareholders B) the board of directors C) the chief executive officer D) the controller

C

Consider the above statement of cash flows. In 2008, AOS Industries had contemplated buying a new warehouse for $2 million, the cost of which would be depreciated over 10 years. If AOS Industries has a tax rate of 25%, what would be the impact for the amount of cash held by AOS at the end of the 2008? A) It would have $2,000,000 less cash at the end of 2008. B) It would have $1,950,000 less cash at the end of 2008. C) it would have $150,000 less cash at the end of 2008. D) it would have an additional $50,000 in cash at the end of 2008.

B

How do the shareholders of most corporations exercise their control of that corporation? A) by voting on issues that concern them B) by electing members of a board of directors C) by vetting the decisions of the board of directors D) by providing oversight of the day to day running of the corporation

B

Put the following steps of the financial cycle in the correct order: I. Money flows to companies who use it to fund growth through new products II. People invest and save their money III. Money flows back to savers and investors A) I, II, III B) II, I, III C) III, II, I D) II, III, I

B

The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. How would the balance sheet change if the company's long-term assets were judged to depreciate at an extra $5 million per year? A) Net property, plant, and equipment would rise to $126 million, and Total Assets and Stockholders' Equity would be adjusted accordingly. B) Net property, plant, and equipment would fall to $116 million, and Total Assets and Stockholders' Equity would be adjusted accordingly. C) Long-Term Liabilities would rise to $182 million, and Total Liabilities and Stockholders' Equity would be adjusted accordingly. D) Long-Term Liabilities would fall to $172 million, and Total Liabilities and Stockholders' Equity would be adjusted accordingly.

B

The financial manager of a well-regarded book publishing firm wishes to buy a small Internet publishing company to provide an avenue for sale of its materials online. In order to raise the funds to make this purchase, the financial manager decides to sell more stock in the company. How is the financial manager raising funds in this case? A) by increasing the debt burden carried by the company B) by raising the company's equity by encouraging new owners to take a stake in the company C) by decreasing the ratio of equity to debt held by the company D) by increasing the value of shares held by the existing owners of the company

B

The notes to the financial statements would be LEAST likely to be used for which of the following purposes? A) to provide information regarding the context in which these financial numbers were generated B) to disclose the financial implications of any off balance sheet transactions C) to show how the value of assets listed in the financial statements were arrived at D) to explain the method of accounting that was used in the preparation of the financial statements

B

To compute the future value of a cash flow, you must: A) discount it. B) compound it. C) double it. D) arbitrage it.

B

U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form? A) 10-A B) 10-K C) 10-Q D) 10-SEC

B

What is a competitive market? A) a market in which goods can be bought at the ask price and sold at bid price B) a market in which a good can be bought and sold at the same price C) a market in which a good is sold at a lower price than that for which it can be bought D) a market in which a good is bought for a lower price than that for which it can be sold

B

What is a firm's gross profit? A) the difference between the sales and other income generated by the firm, and all costs, taxes, and expenses incurred by the firm in a given period B) the difference between sales revenues and the costs associated with those sales. C) the difference between sales revenues and cash expenditures associated with those sales. D) all of the above

B

What is the process of double taxation for the stockholders in a C corporation? A) Their shares are taxed when they are both bought and sold. B) The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them. C) The owners of a corporation are taxed when they receive dividend payments and when they D) The corporation must pay taxes on any profits it makes, and the capital raised by the sale of shares is also subject to taxation.

B

Whenever a good trades in a competitive market, the ________ determines the value of the good. A) supply B) price C) demand D) cost

B

Which of the following best explains why market prices are useful to a financial manager when performing a cost benefit analysis? A) They can be used to determine how much an asset can be sold for. B) They can be used to convert different services and commodities into equivalent cash values which can be compared. C) They allow all commodities and services to be assigned a fixed and unchanging value. D) They can be evaluated to determine whether the market in which the manager exchanges goods and services offers true value.

B

Which of the following is NOT a financial statement that every public company is required to produce? A) income statement B) statement of sources and uses of cash C) balance sheet D) statement of stockholders' equity

B

Which of the following is NOT considered to be an operating expense on the income statement? A) administrative expenses and overhead B) corporate taxes C) salaries D) depreciation and amortization

B

Which of the following is a measure of the aggregate price level of collections of pre-selected stocks? A) NASDAQ B) S&P 500 C) NYSE D) Euronext

B

Which of the following is a way that the Operating Activity section of the statement of cash flows adjusts Net Income from the balance sheet? A) It subtracts all expenses and costs related to the firm's operating activities. B) It adds all non-cash entries related to the firm's operating activities. C) It adds the cash that flows from investors to the firm. D) It removes the cash used for investment purposes.

B

In which of the following ways is a limited liability company like a corporation? A) Both types of firm were created and developed first in the United States. B) Both can choose to be considered a partnership for tax purposes. C) All of its owners' liability is restricted to their investment in the firm. D) It is directly managed by the owners of the firm.

C

Which of the following is the best statement of the Valuation Principle? A) It is not possible to compare costs and benefits that occur at different points in time, in different currencies, or with different risks. B) The value of a commodity or an asset to the firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm. C) The rate at which we can exchange money today for money in the future by borrowing or investing is the current market interest rate and is same across all banks. D) If equivalent goods or securities trade simultaneously in different markets across the world, they will trade for the same price.

B

Which of the following statements regarding the valuing of costs and benefits is NOT correct? A) The first step in evaluating a project is to identify its costs and benefits. B) In the absence of competitive markets, we can use one-sided prices to determine exact cash values. C) Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker. D) Because competitive markets exist for most commodities and financial assets, we can use them to determine cash values and evaluate decisions in most situations.

B

Why is a stock exchange like NASDAQ considered a secondary market? A) It trades the second largest volume of shares in the world. B) Shares sold on it are exchanged between investors without any involvement of the issuing corporation. C) The exchange has rules that attempt to ensure that bid and ask prices do not get too far apart D) NASDAQ is called a secondary market because NYSE is considered a primary market.

B

Why is it usually necessary to use the time value of money when performing a cost benefit analysis? A) For an investment project to be considered, costs must have a higher dollar value from benefits. B) In most investment projects costs are incurred up front, but benefits are provided in the future. C) For practical purposes, a dollar today may be considered to be equal to a dollar at some future time. D) Although costs and benefits generally occur concurrently, the benefits will accrue value over time, due to interest.

B

Why is the stock price of a company an indication of the performance of that company's senior managers? A) Well-run companies are invariably highly profitable, which leads to a higher share price. B) In general, people want to invest in a well-managed corporation, which will drive up the price of shares. C) Investors who can see that a company is well-run will hold on to their shares, even if the company faces temporary set-backs, since they know that the stock price will likely rise again. D) Larger companies tend to be better run and so have higher stock prices.

B

A 2008 Toyota Camry can be bought in Buffalo, NY, for $18,720. The same model Camry can be purchased across the Canadian border in Hamilton, ON. If cars could be freely traded across the border, what would be the expected price of a 2008 Toyota Camry in Hamilton in Canadian dollars, given that $1 U.S. is equal to $0.98 Canadian? A) $18,345 B) $18,720 C) $19,102 D) $20,212

C

A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet? A) commercial paper held by the company B) the inventory of chemicals used to produce the drugs made by the company C) a patent for a drug held by the company D) the cash reserves of the company

C

A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, in the firm's management discussion and analysis (MD&A)? A) that a large number of funds were allocated to advertising to increase awareness of the firm's brand in new areas it had expanded into this year B) that some senior members of the management team have retired in this financial year C) that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages D) that the firm has plans to expand into the organic food business in the next financial year by purchasing several small organic food retailers

C

An elderly relative offers to sell you their used 1958 Cadillac Eldorado for $50,000. You note that very similar cars are selling on the open market for $90,000. You don't care for classic cars and would rather buy a new Ford Explorer for $35,000. What is the net value of buying the Cadillac?

C

Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the gross margin for 2008 and 2009. What does the change in the gross margin between these two years imply about the company? A) The efficiency of Xenon Manufacturing has significantly risen between 2008 and 2009. B) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them rose between 2008 and 2009. C) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them fell between 2008 and 2009. D) The leverage of Xenon Manufacturing fell slightly between 2008 and 2009.

C

Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the operating margin for 2008 and 2009. What does the change in the operating margin between these two years imply about the company? A) The efficiency of Xenon Manufacturing has significantly risen between 2008 and 2009. B) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them rose between 2008 and 2009. C) The efficiency of Xenon Manufacturing has significantly fallen between 2008 and 2009. D) The leverage of Xenon Manufacturing fell slightly between 2008 and 2009.

C

Gross profit is calculated as A) Total sales - Cost of sales - Selling, general, and administrative expenses - Depreciation and amortization B) Total sales - Cost of sales - Selling, general, and administrative expenses C) Total sales - Cost of sales D) none of the above

C

If money is invested at 8% per year, after approximately how many years will the interest earned be equal to the original investment? A) 5 years B) 6 years C) 9 years D) 12 years

C

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in stockholders' equity between 2007 and 2008? A) The company is very profitable because it is obviously collecting receivables faster. B) The company is selling its property, plant and equipment, which may result in a long-term deficiency in production capacity. C) The company's net income in 2008 was negative. D) No conclusions can be drawn regarding stockholders' equity without additional information.

C

Joe is a general partner in a limited partnership firm, while Jane is a limited partner in that same firm. Which of the following statements regarding their respective relationships to the firm are correct? A) Joe has no management authority within the partnership. B) Jane is legally involved in the managerial decision making of the firm. C) Jane's liability for the firm's debts consists solely of her investment in the firm. D) Withdrawal of Jane from the partnership will dissolve that partnership.

C

Joe, who puts down $3500 to buy a car, and then makes annual payments of $1000 B) Harry, who borrows $3500, and then receives an annual payment of $1000 C) Karen, who loans a friend $3500, which friend then pays back the loan in four annual installments of $1000 D) Leo, who borrows $3500, and then pays back the loan in four annual payments of $1000

C

The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. If the company has 4 million shares outstanding, and these shares are trading at a price of $8.24 per share, what does this tell you about how investors view this firm's book value? A) Investors consider that the firm's market value is worth very much less than its book value. B) Investors consider that the firm's market value is worth less than its book value. C) Investors consider that the firm's market value and its book value are roughly equivalent. D) Investors consider that the firm's market value is worth more than its book value.

C

The exchanges in which of the following countries or regions do NOT accept the International Financial Reporting Standards set out by the International Accounting Standards Board? A) Germany B) France C) United States D) United Kingdom

C

The major components of stockholders' equity are: A) Cash, common stock and paid-in surplus B) Common stock, paid-in surplus and net income C) Common stock, paid-in surplus and retained earnings D) Common stock, liabilities and retained earnings

C

Which of the following amounts would NOT be included on the right side of a balance sheet? A) the value of government bonds held by the company B) the cash held by the company C) the amount of deferred tax liability held by the company D) the amount of money owed to the company by customers who have not yet paid for goods and services they have received

C

Which of the following balance sheet equations is INCORRECT? A) Assets - Liabilities = Shareholders' Equity B) Assets = Liabilities + Shareholders' Equity C) Assets - Current Liabilities = Long Term Liabilities D) Assets - Current Liabilities = Long Term Liabilities + Shareholders' Equity

C

Which of the following best describes why firms produce financial statements? A) to use as a tool when planning future investments within the firm B) to provide a means of enticing new investors to a firm C) to provide interested parties, both inside and outside the company, with an overview of the short and long term financial condition of a business D) to show what activities the company has undertaken in the previous financial year, and what activities are planned for the near future

C

Which of the following best describes why the left and right sides of a balance sheet are equal? A) In a properly run business, the value of liabilities will not exceed the assets held by the company. B) By definition, the assets plus the liabilities will be the same as the stockholders' equity. C) The assets must equal liabilities plus stockholders' equity, because stockholders' equity is the difference between the assets and the liabilities. D) By accounting convention, the assets of a company must be equal to the liabilities of that company.

C

Which of the following is NOT a reason why financial managers must take great care when making investment decisions? A) These investment decisions determine whether the firm will add value for its owners. B) These investments determine the long-term directions in which the company may move. C) These investment decisions determine the corporations mix of debt and equity. D) These investment decisions typically involve substantial costs which must be carefully weighed against their potential benefits.

C

Which of the following is NOT an advantage of a sole proprietorship? A) single taxation B) ease of setup C) limited liability D) no separation of ownership and control

C

Which of the following is an example of arbitrage? A) An inventor of a new hydrocarbon cracking technology based on palladium buys this metal knowing that its price will rise when the technology is adopted. B) A metals merchant is offered $108,000 in one year for $100,000 of palladium today, when the interest rate is 10%. C) An investor, seeing that the price of palladium on the metals exchange in two different countries is slightly different, buys on one and sells on the other to make a profit. D) A firm buys $250,000 of palladium today, with an option to sell it at $275,000 in one year if interest rates rise above 10%.

C

Which of the following is not a role of financial institutions? A) Moving funds from savers to borrowers. B) Spreading out risk-bearing. C) Printing money for borrowers. D) Moving funds though time.

C

Which of the following is typically the major factor in limiting the growth of a sole proprietorship? A) The organization of such firms tends to become extremely complicated over time. B) It is extremely difficult to transfer control of such a firm to a new owner if the present owner dies or wishes to sell the firm. C) The amount of money that can be raised by the firm is limited by the fact that the single owner must make good on all debts. D) Investors have a great deal of control over the day-to-day running of the firm, leading to confusion when conflicts in direction arise.

C

Which of the following organization forms has the most revenue? A) S corporation B) limited partnership C) C corporation D) limited liability company

C

Which of the following people may not manage the operations of a firm in which they are part or full owners? A) stockholders in S corporations B) stockholders in C corporations C) limited partners in a limited partnership D) general partners in a limited partnership

C

Which of the following statements is INCORRECT? A) In general, money toady is worth more than money in one year. B) We define the risk-free interest rate (rf) for a given period as the interest rate at which money can be borrowed or lent without risk over that period. C) We refer to (1 - rf) as the interest rate factor for risk-free cash flows. D) For most financial decisions, costs and benefits occur at different points in time.

C

Which of the following statements regarding arbitrage and security prices is INCORRECT? A) We call the price of a security in a normal market the no-arbitrage price for the security. B) In financial markets it is possible to sell a security you do not own by doing a short sale. C) When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds. D) The general formula for the no-arbitrage price of a security is Price(security) = PV(all cash flows paid by the security).

C

Why are arbitrage opportunities short-lived? A) Federal regulations will kick in to restrict trade and effectively shut the opportunity down. B) Prices will fluctuate up and down as traders take advantage of the opportunity, resulting in the net present value (NPV) fluctuating between positive and negative values. C) Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal. D) Arbitrage opportunities need a lot of information processing, which is very slow to arrive.

C

WorldCom classified $3.85 billion in operating expenses as long-term investments. How would this make WorldCom's financial statements more attractive to investors? A) by decreasing depreciation B) by reducing capital expenditures C) by raising its reported earnings D) by boosting its cash flows

C

You are scheduled to receive $10,000 in one year. An increase in the interest rate will have what effect on the future value of this cash flow? A) It will cause the future value to fall. B) It will cause the future value to rise. C) It will have no effect on the future value. D) The effect cannot be determined with the information provided.

C

A U.S.-based manufacturer of sunscreen is contemplating using funds to purchase courtside advertising at major tennis matches such as the French Open and the Australian Open. Advertising at such well viewed international events will then raise the domestic sales of the manufacturers products. Which of the following factors will probably raise the LEAST difficulties when comparing the costs and benefits associated with this particular decision? A) The costs will be incurred well before any benefits are likely to be seen. B) The costs and benefits will be in different currencies. C) The costs and benefits will not be expressed in common terms. D) The costs and benefits will be difficult to measure.

D

A ________ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO. A) shareholder proposal B) leveraged buyout C) shareholder action D) hostile takeover

D

A typical company has many types of shareholders, from individuals holding a few shares, to large institutions that hold very large numbers of shares. How does a financial manager ensure that the priorities and concerns of such disparate stockholders are met? A) The financial manager should seek to make investments that do not harm the interests of the stockholders. B) The decisions taken by the financial manager should be solely influenced by the benefit to the company since, by maximizing its fitness, he or she will also maximize the benefits of that company to the shareholders. C) The financial manager should consider the interests and concerns of large shareholders a priority, so the needs of those who hold a controlling interest in the company are met. D) In general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment.

D

Accounts payable is a A) Long-Term Liability. B) Current Asset. C) Long-Term Asset. D) Current Liability.

D

An investment will pay $205,000 at the end of next year for an investment of $183,000 at the start of the year. If the market interest rate is 8% over the same period, should this investment be made? A) No, because the investment will yield $6240 less than putting the money in a bank. B) Yes, because the investment will yield $2360 more than putting the money in a bank. C) Yes, because the investment will yield $4280 more than putting the money in a bank. D) Yes, because the investment will yield $7360 more than putting the money in a bank.

D

An investor has the opportunity to buy a $10,000 government bond which is guaranteed to yield 6.5% interest in one year's time. The investor decides to make the investment as there is a net difference between the cost and benefit. Which of the following is NOT a reason that the investor's decision may be flawed? A) It does not consider the current market interest rate. B) It ignores the fact that the costs are incurred today, but the benefits occur in one year's time. C) It does not consider the value of the $10,000 in one year's time if invested elsewhere. D) It does not consider whether the $10,000 will be needed elsewhere.

D

Consider the above statement of cash flows. What were AOS Industries' major means of raising money in 2008? A) from investment activities B) by sale of stock C) from its operations D) by issuing debt

D

Consider the above statement of cash flows. Which of the following is true of AOS Industries' operating cash flows? A) It collected more cash from its customers than they charged. B) It sold more inventory than it bought. C) It charged more on its accounts payable back than it paid back. D) All of the above are true.

D

How can we convert the value of money from one point in time to another? A) using the current exchange rate B) using a cost benefit analysis C) using the Valuation Principle D) using the current interest rate

D

If the above balance sheet is for a retail company, how has the company's leverage changed between 2007 and 2008? A) The company has experienced a very significant decrease in its leverage. B) The company has experienced a significant decrease in its leverage. C) The company has experienced no significant change in its leverage. D) The company has experienced a significant increase in its leverage.

D

If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in quick ratio between 2007 and 2008? A) The company has eliminated the risk that it will experience a cash shortfall in the near future. B) The company has reduced the risk that it will experience a cash shortfall in the near future. C) The risk that the company will experience a cash shortfall in the near future is unchanged. D) The company has increased the risk that it will experience a cash shortfall in the near future.

D

If the exchange rates, after fees, in Tokyo are ¥1000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 = ¥171, which of the following would you expect to occur? A) a surge in conversion of dollars to yen in Tokyo B) a surge in conversion of euros to yen in Tokyo C) a surge in conversion of euros to dollars in Paris D) a surge in conversion of euros to yen in Paris

D

In which of the following relationships is an agency conflict problem LEAST likely to arise? A) the relationship between a hire-car company and the persons who hire that company's cars regarding the treatment of those cars B) the relationship between high-level military officers and the soldiers who serve under them regarding the willingness of the soldiery to take risks C) the relationship between a restauranter and the suppliers of produce to that restaurant regarding the freshness of the produce supplied D) the relationship between a driver and the passengers in a car regarding the safe driving of that car

D

Investments by wealthy individuals and endowments is a major source of money for each of the following except: A) private equity funds. B) hedge funds. C) venture capital funds. D) mutual funds.

D

Like other metals, uranium 308 is traded in competitive markets like the New York Metals Exchange. Which of the following would most likely value a given weight of uranium 308 the most? A) a power station that uses uranium 308 to produce electrical energy B) a metals trader who stockpiles and sells actual physical quantities of uranium 308 C) a speculator who buys and sells uranium 308 on the market without ever using the metal D) All buyers and sellers would have the same value for 250 pounds of uranium.

D

One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive? A) The assets should have been listed on the balance sheet as long term assets. B) Cash raised by selling assets should not be recorded as revenue. C) The cash raised should have been recorded as short-term loans. D) The off balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement.

D

Over four-fifths of all U.S. business revenue is generated by which type of firm? A) sole proprietorships B) partnerships C) limited partnerships D) corporations

D

The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation? A) The State Bank would experience a surge in demand for loans. B) The Colonial Bank would experience a surge in demand for deposits. C) The State Bank would experience a fall in demand for deposits. D) The Colonial Bank would experience a surge in demand for loans.

D

The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP) and verifies that the information reported is reliable is the A) NYSE Enforcement Board. B) Accounting Standards Board. C) Securities and Exchange Commission (SEC). D) auditor.

D

What are the requirements of section 404 of SOX? A) It requires that senior management return any profits or bonuses resulting from stock sales during any period covered by financial statements that must later be restated. B) It requires that auditors do not perform any non-auditing tasks for the companies they audit.. C) It requires that audit partners rotate every five years. D) It requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process.

D

What is a firm's net income? A) the difference between the sales and other income generated by the firm, and all costs, taxes, and expenses incurred by the firm in a given period B) the last or "bottom" line of the income statement C) a measure of the firm's profitability over a given period D) all of the above

D

What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements? A) It is easier to find specific information in such a report if it is laid out in a clear and consistent manner. B) It ensures that information on the performance of private companies is readily available to the public. C) It ensures that important information is not omitted and superfluous information is not included. D) It makes it easier to compare the financial results of different firms.

D

What is the major advantage corporations have over other business entities? A) It is easier for a corporation to raise capital than other forms of businesses. B) A corporation is treated as a separate legal entity for tax and legal purposes. C) A corporation's shares can be freely traded among its shareholders. D) All of the above are advantages that a corporation has over other business forms.

D

What is the major way in which the roles and obligations of the owners of a limited liability company differ from the roles and obligations of limited partners in a limited partnership? A) The owners of a limited liability company have personal obligation for debts incurred by the company. B) There is no separation between the company and its owners in a limited liability company. C) The owners of a limited liability company can withdraw from the company without the company being dissolved. D) The owners of a limited liability company can take an active role in running the company.

D

What is the most important duty of a financial officer? A) to ensure that the firm has enough cash on hand to meet its commitments at any given time B) to decide how to pay for investments C) to manage working capital D) to make investment decisions

D

Which of the following are major duties of a financial manager? I. To make investment decisions II. To make financing decisions III. To manage cash flow from operating activities A) I only B) I and II only C) I and III only D) all of the above

D

Which of the following are unique for an S corporation? A) The firm's profits and losses are not taxed at the corporate level, but shareholders must include these profits and losses on their individual tax returns. B) The shareholders of an S corporation must include the firm's profit and losses in their individual income taxes even if no money is distributed to them. C) There is a maximum limit on the number of shareholders for an S corporation. D) all of the above

D

Which of the following best describes why the Valuation Principle is a key concept in making financial decisions? A) It shows how to assign monetary value to intangibles such as good health and well-being. B) It allows fixed assets and liquid assets to be valued correctly. C) It gives a good indication of the net worth of a person, item, or company and can be used to estimate any changes in that net worth. D) It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.

D

Which of the following features of a corporation is LEAST accurate? A) The owners' identity is separate from the corporation. B) The owners of the corporation have unlimited liability for the corporations debts. C) Changes in ownership do not result in the dissolution of the corporation. D) Earnings from the corporation are taxed only once.

D

Which of the following firms would be expected to have a high ROE based on that firm's high operating efficiency? A) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals B) a high-end fashion retailer that has a very high mark-up on all items it sells C) a brokerage firm that has high levels of leverage D) a grocery store chain that has very high turnover, selling many multiples of their assets per year

D

Which of the following is NOT a function of the board of directors? A) determining how top executives should be compensated B) monitoring the performance of the company C) answering to shareholders of the company D) day-to-day running of the company

D

Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned? A) It includes entries for the depreciation of assets. B) It does not include entries for expenditures on inventory. C) It does not include entries for collection of money from account receivables. D) It includes cash inflows from services rendered.

D

Which of the following is NOT one of the financial statements that must be produced by a public company? A) the balance sheet B) the income statement C) the statement of cash flows D) the statement of activities

D

Which of the following is NOT one of the ways that the Sarbanes-Oxley Act sought to improve the accuracy of information given to both boards and shareholders? A) by increasing the penalties to firms for providing false information B) by increasing the independence of auditors and clients C) by decreasing the non-audit fees that an auditor can receive from a client D) by forcing companies to audit financial statements they release

D

Which of the following is the main lesson that analysts and investors should take from the cases of Enron and WorldCom? A) The usefulness of financial statements to investors is entirely dependent on the ethics of those constructing them. B) It is not possible to effectively evaluate a company unless all the financial statements are fully and correctly prepared. C) The information in financial statements should be viewed extremely critically. D) Readers of even fraudulent financial statements can spot signs of a firm's financial health if those statements are read fully and with care.

D

Which of the following is the overarching principal that a financial manager should follow when making decisions? A) Decisions should generate the greatest benefits for the firm. B) Decisions should provide benefit to the firm without incurring costs greater than those benefits to others. C) Decisions should be on behalf of the firm's owners that give the greatest benefit to those owners, the firm's employees and the firm's other stakeholders. D) Decisions should increase the value of the firm to its investors.

D

Which of the following need be true for an asset to be considered liquid? A) It pays regular dividends. B) It can be bought and sold at an organized stock market or bourse. C) It is offered for sale on both primary and secondary markets. D) It can be easily bought and sold and the selling price is very close to the buying price at a given point in time.

D

Which of the following statements is FALSE? A) The process of moving a value or cash flow forward in time is known as compounding. B) The effect of earning interest on interest is known as compound interest. C) It is only possible to compare or combine values at the same point in time. D) A dollar in the future is worth more than a dollar today.

D

Which of the following statements regarding the Law of One Price is INCORRECT? A) At any point in time, the price of two equivalent goods trading in different competitive markets will be the same. B) One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value (NPV), we can use any competitive price to determine a cash value, without checking the price in all possible markets. C) If equivalent goods or securities trade simultaneously in different competitive markets, then they will trade for the same price in both markets. D) An important property of the Law of One Price is that it holds even in markets where arbitrage is not possible.

D

Which of the following statements regarding the balance sheet is INCORRECT? A) The balance sheet provides a snapshot of the firm's financial position at a given point in time. B) The balance sheet lists the firm's assets and liabilities. C) The balance sheet reports stockholders' equity on the right-hand side. D) The balance sheet reports liabilities on the left-hand side.

D

Why in general do financial managers make financial decisions in a corporation, rather than the owners making these decisions themselves? A) It is best for the control of the finances of a corporation to be in the hands of a disinterested third party. B) The interests of the various owners may conflict with each other. C) The owners may not be U.S. citizens or residents. D) There are often many owners, and they can often change as they buy and sell stock.

D

Why is it in general difficult to determine the market price of a private corporation's shares at any point in time? A) It is difficult to obtain enough information to accurately value such a company. B) The price of its shares is fixed by the owners. C) It has a limited number of owners. D) There is no organized market for its shares.

D

Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoy protection against the seizure of its property? A) The number of owners, and hence the spread of risk among these owners, is not limited. B) Its owners are liable for any obligations it enters into. C) The state in which the corporation is incorporated provides safeguards against any wrongdoing by the corporation. D) It is a legally defined, artificial entity that is separate from its owners.

D

Why is the personal decision a financial manager makes as to whether to buy or to rent an apartment as a personal residence most like the professional decision that manager makes as to whether her firm should try to acquire a stake in a fast growing new Internet-based company? A) Both decisions involve the purchase of assets. B) Both decisions will be made based on what provides the greatest long-term benefit. C) Both decisions are vital to the financial health of the decision maker. D) Both decisions should be made based upon the tradeoff benefits and costs across time.

D

Why must care be taken when comparing a firm's share price to its operating income? A) Both share price and operating income are related to the whole firm. B) Share price is a quantity related to the entire firm, while operating income is an amount that is related solely to equity holders. C) Both share price and operating income are related solely to equity holders. D) Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm.

D

Why should you approach every problem by drawing a timeline? A) Timelines allow you to quickly sum cash flows over time. B) Timelines eliminate the majority of flawed financial decisions. C) Timelines can be used to schedule events which are yet to occur. D) Timelines identify events in a transaction or investment which might otherwise be easily overlooked.

D

A dollar today and a dollar in one year may be considered to be equivalent.

FALSE

Financial decisions require that you weigh alternatives in strictly monetary terms.

FALSE

Financial statements are accounting reports issued periodically by a firm which present information on the past performance of the firm, a summary of the firm's assets and the financing of those assets, and a prediction of the firm's future performance.

FALSE

If broker will buy a share of stock from you at $3.85 and sell it to you at $3.87, the ask price would be $3.85.

FALSE

In most corporations the owners exercise direct control of the corporation. Answer:

FALSE

In order to distinguish between inflows and outflows, different colors are assigned to each of these cash flows when constructing a timeline.

FALSE

In the United States, publicly traded companies can choose whether or not they wish to release periodic financial statements.

FALSE

International Financial Reporting Standards are taking root throughout the world. However, it is unlikely that the U.S. will report according to IFRS before the second half of the twenty-first century.

FALSE

It is generally not the duty of financial managers to ensure that a firm has the cash it needs for day-to-day transactions.

FALSE

Partnerships are the most common type of business firm in the world.

FALSE

Raising new capital by issuing bonds is an example of a commercial banking activity.

FALSE

The balance sheet shows the assets, liabilities, and stockholders' equity of a firm over a given length of time.

FALSE

The fact that corporations' shares are easily traded within the market has a net effect of acting as a disincentive for managers to favor the interests of shareholders over their own interests.

FALSE

The management of public companies are not legally required to disclose any off balance sheet transactions.

FALSE

The shares of private corporations are traded on a stock market.

FALSE

To calculate a cash flow's present value (PV), you must compound it.

FALSE

To enable costs and benefits to be compared they are typically converted into cash value at the time the benefit is received.

FALSE

Use of Generally Accepted Accounting Principles (GAAP) and auditors have eliminated the danger of inadvertent or deliberate fraud in financial statements.

FALSE

Corporations have come to dominate the business world through their ability to raise large amounts of capital by sale of ownership shares to anonymous outside investors.

TRUE

Costs and benefits must be put in common terms if they are to be compared.

TRUE

Dollar amounts received at different points in time cannot be compared in absolute terms.

TRUE

If an arbitrage opportunity exists, an investor can act quickly in the hope of making a risk-free profit.

TRUE

In general, if an action increases a firm's value by providing benefits with a value greater than any costs involved, then that action is good for the firm's investors.

TRUE

Price-earnings ratios tend to be high for fast-growing firms.

TRUE

Stock markets provide liquidity for a firm's shares.

TRUE

Stockholders' equity is the difference between a firm's assets and liabilities, as shown on the balance sheet.

TRUE

The Law of One Price states that if equivalent goods or securities are traded simultaneously in different competitive markets, they will trade for the same price in each market.

TRUE

The Valuation Principle shows how to make the costs and benefits of a decision comparable so that we can evaluate them properly.

TRUE

The firm's statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period.

TRUE

The income statement reports the firm's revenues and expenses, and it computes the firm's bottom line of net income, or earnings.

TRUE

The one-year discount factor is the discount at which we can purchase money in the future.

TRUE

The principal goal of the financial manager is to maximize the wealth of the stockholders. Answer:

TRUE

The rule of 72 tells you approximately how long it takes for money invested at a given rate of compound interest to double in value.

TRUE

Whenever a good trades in a competitive market, the price the good trades for determines the value of the good.

TRUE