Exam 1 Study Guide Fundamental of Business Finance

Refer to Exhibit 4.1. What is the firm's P/E ratio? Do not round your intermediate calculations. a. 12.0 b. 12.6 c. 13.2 d. 13.9 e. 14.6

A.) 12.0 P/E ratio = Price per share/Earnings per share = 12.0 We actually fixed the P/E ratio at 12 in order to get a stock price. Either the price or the P/E ratio must be fixed or the model becomes very complicated and a stock pricing equation is required

Refer to Exhibit 4.1. What is the firm's ROA? Do not round your intermediate calculations. a. 3.30% b. 2.61% c. 2.97% d. 3.04% e. 3.10%

A.) 3.30% ROA = Net income/Total assets = 3.30%

Persian Rugs needs $600 million to support growth next year. If it issues new common stock to raise the funds, the flotation (issuance) costs will be 4 percent. If Persian can issue stock at $125 per share, how many shares of common stock must be issued so that it has $600 million after flotation costs to use for its planned growth? a. 5,000,000 b. 4,800,000 c. 4,992,000 d. 4,512,000 e. 4,000,000

A.) 5,000,000

When a corporation wants to raise funds by issuing new stocks or bonds, it generally uses the services of _____. a. an investment banker b. a commercial lender c. the Securities and Exchange Commission (SEC) d. the New York Stock Exchange (NYSE) e. an over-the-counter derivatives market

A.) An investment Banker

Which form of informational efficiency states that current market prices of securities reflect all pertinent information? a. Strong-form b. Semistrong-form c. Weak-form d. Economic-form e. Real-form

A.) Strong-form

Financial intermediaries spread their risk by providing funds to a large number and variety of borrowers by offering many different types of loans. Due to this, the loan portfolios of intermediaries are said to be _____. a. well diversified b. well consolidated c. economically efficient d. partially underwritten e. partially shelf registered

A.) Well diversified

Welsh Corporation wants to issue debt of $525,000 to invest in a new project. Welsh is required to pay its investment banker 5 percent of the issue's total value. There are no other floatation costs. Compute the amount of debt that the firm must issue to net $525,000 after flotation costs. a. $525,347 b. $552,632 c. $498,752 d. $551,257 e. $575,886

B.) $552,632

Refer to Exhibit 4.1. What is the firm's quick ratio? Do not round your intermediate calculations. a. 0.50 b. 0.55 c. 0.61 d. 0.52 e. 0.65

B.) 0.55 Quick ratio = (CA - Inventory)/CL = 0.55

Refer to Exhibit 4.1. What is the firm's ROE? Do not round your intermediate calculations. a. 11.77% b. 11.00% c. 11.55% d. 10.89% e. 10.01%

B.) 11.00% ROE = Net income/Common equity = 11.00%

Organizations that create various loans and investments from funds provided by depositors are known as _____. a. investment banks b. financial intermediaries c. derivatives markets d. over-the-counter markets e. designated market makers

B.) Financial intermediaries

Zinc Corporation, a large, well-known public company that frequently issues securities, filed a master registration statement with the Securities and Exchange Commission (SEC). This master statement is updated with a shortform statement just prior to each individual security offering. What is this arrangement called? a. Underwriting registration b. Shelf registration c. Best-effort registration d. Multiple registration e. Initial public offering registration

B.) Shelf registration

Refer to Exhibit 4.1. What is the firm's total assets turnover? Do not round your intermediate calculations. a. 1.51 b. 1.15 c. 1.40 d. 1.06 e. 1.71

C.) 1.40 Total assets turnover ratio = TATO = Sales/Total assets = 1.40

Ship Shape Marine (SSM) needs $92 million to support future growth. If SSM issues bonds to raise funds, flotation (issuance) costs will be 8 percent. Each bond will be sold for $1,000; fractions of bonds cannot be issued. How many bonds must be issued so that SSM has $92 million after flotation costs to use for its planned growth? a. 99,360 b. 92,000 c. 100,000 d. 84,640 e. 108,000

C.) 100,000

Which of the following examples involves the sacrifice of current income for greater expected earnings in the future? a. Buying a car with own surplus funds b. Buying a car with a bank loan c. Buying a financial security (e.g., a bond or a stock) with one's own funds d. Buying a security with borrowed funds e. Buying a house

C.) Buying a financial security (e.g., a bond or a stock) with one's own funds

Which of the following functions deals with the management of money? a. Marketing b. Human resources c. Financial services d. Information systems e. Research and development

C.) Financial services

Devine Linens (DL) must raise $14,000,000 to support future growth. If it raises the funds by issuing stock, DL must pay an investment banker 5 percent of the total amount issued plus $250,000 in other costs associated with the issue. What is the amount of stock that DL must issue to net $14,000,000 after flotation costs? a. $14,962,500 b. $14,950,000 c. $14,737,092 d. $15,000,000 e. $13,537,500

D.) $15,000,000

Greenwood Builders Ltd. has a debt ratio of 35 percent and it has total assets of $750,000. What is the value of their total liabilities? a. $750,000 b. $1,000,000 c. $450,000 d. $262,500 e. $153,200

D.) $262,500

The book value per share of Topaz General Ltd. is $10 per share and the company has a total of 4 million shares. Calculate the total book value of common equity of the company. a. $4 million b. $10 million c. $400 million d. $40 million e. $100 million

D.) $40 million

Refer to Exhibit 4.1. What is the firm's profit margin? Do not round your intermediate calculations. a. 1.84% b. 2.48% c. 1.82% d. 2.36% e. 2.52%

D.) 2.36% Profit margin = Net income/Sales = 2.36%

Refer to Exhibit 4.1. What is the firm's TIE? Do not round your intermediate calculations. a. 4.99 b. 4.81 c. 5.32 d. 4.67 e. 5.09

D.) 4.67 TIE = EBIT/Interest charges = 4.67

Refer to Exhibit 4.1. What is the firm's current ratio? Do not round your intermediate calculations. a. 0.87 b. 0.85 c. 1.23 d. 1.09 e. 1.17

D.) Current ratio = Current assets/Current liabilities = 1.09

Which of the following financial statements shows a firm's financing activities (how funds were generated) and investment activities (how funds were used) over a particular period of time? a. Balance sheet b. Income statement c. Statement of retained earnings d. Statement of cash flows e. Proxy statement

D.) Statement of retained earnings

Amber Devices Ltd. has total assets worth $900 million and total liabilities worth $475 million at the end of December 31. What is the amount of money received by the stockholders, if Amber liquidates all of its assets for $850 and pays off all of its outstanding debt at book value? a. $850 million b. $475 million c. $1,325 million d. $425 million e. $375 million

E.) $375 million

Refer to Exhibit 4.1. What is the firm's market-to-book ratio? Do not round your intermediate calculations. a. 1.35 b. 1.00 c. 1.65 d. 1.33 e. 1.32

E.) 1.32 Market/book ratio (M/B) = Price per share/BVPS = 1.32

A firm has total assets of $500 million, including its accounts receivable, which is worth $120 million. The annual sales of the firm is $650 million. The days sales outstanding (DSO) ratio of the firm is: a. 48.2 days. b. 52.7 days. c. 39.6 days. d. 82.1 days. e. 66.5 days.

E.) 66.5 days

Identify the correct statement about business ethics. a. Good business ethics decrease shareholders' trust in the company. b. Good business ethics result in recurring fines and legal expenses. c. Good business ethics attract business from customers who appreciate and support specific political parties. d. Good business ethics reduce the economic viability of the communities where these firms operate. e. Good business ethics attract and keep employees of the highest caliber.

E.) Good business ethics attract and keep employees of the highest caliber.

Which of the following financial statements is included in the annual reports of a company? a. Statement of changes in long-term financing b. Fund flow statement c. Statement of principles d. Proxy statement e. Statement of cash flows

E.) Statement of cash flows

Compared to corporations, what is the primary disadvantage of partnerships as a form of business organization? a. The tax rates applied to partnerships are higher than the tax rates applied to corporations. b. Any dividends paid to the owners of a partnership business are taxed twice, once at the partnership level and once at the personal, or individual level. c. Partnerships generally are more complex to form (start up) than corporations. d. Partnerships have unlimited lives whereas corporations do not. e. The owners of a partnership, that is, the partners, have unlimited liability when it comes to business obligations whereas the owners of a corporation have limited liability.

E.) The owners of a partnership, that is, the partners, have unlimited liability when it comes to business obligations whereas the owners of a corporation have limited liability.

A decline in the inventory turnover ratio suggests that the firm's liquidity position is improving. a. True b. False

False

A money market is the market for trading in securities with maturities greater than one year and includes such financial assets as stocks and long-term corporate bonds. a. True b. False

False

The New York Stock Exchange (NYSE) is an example of an over-the-counter exchange. a. True b. False

False

The Securities and Exchange Commission (SEC) regulations are intended to ensure that investors receive fair disclosure of financial and nonfinancial information from privately held companies. a. True b. False

False

The balance sheet is a financial statement that measures the flow of funds into and out of various accounts over time, whereas the income statement measures the financial position of the firm at a specific point in time. a. True b. False

False

The finance function is relatively independent of most other corporate functions. Marketing decisions, for example, might affect the firm's need for funds but are not affected by conditions in financial markets or other financing issues. a. True b. False

False

Under a best efforts arrangement, the investment banker purchases all of the shares from the issuing firm and then resells them to the public. Under this arrangement, the investment bank assumes significant risk. a. True b. False

False

A proprietorship is an unincorporated business owned by one individual and the owner benefits from the limited liability for business, which limits personal losses to what the proprietor has invested in the company. a. True b. False

Flase

In a competitive marketplace, if managers deviate too far from making decisions that are consistent with stockholder wealth maximization, they risk being disciplined by the market. Part of this discipline involves the threat of being taken over by companies with policies that are more aligned with stockholder interests. a. True b. False

True

In an underwritten arrangement, the investment banker assures the company that is issuing new securities that the entire issue will be sold, which means the investment banker bears significant risks in such an offering. a. True b. False

True

In general, the role of a financial manager is to plan for the acquisition and use of funds so as to maximize the value of the firm. a. True b. False

True

The existence of financial intermediaries greatly increases the efficiency of financial markets because, without them, savers would have to provide funds directly to borrowers, which would be a costlier process. a. True b. False

True