FIN 330 Exam 1
42. A competitive market that allocates funds to their most productive use is called A. a liquid market B. a middleman's market C. an efficient market D. an investor's market
C. an efficient market
38. A financial manager must choose between four alternative investments, 1, 2, 3, and 4. Each asset costs $35,000 and is expected to provide earnings over a three-year period as described below. Asset Year 1 Year 2 Year 3 1 $21,000 $15,000 $ 6,000 2 9,000 15,000 21,000 3 3,000 20,000 19,000 4 6,000 12,000 12,000 Based on the profit maximization goal, the financial manager would choose A. Asset 1. B. Asset 2. C. Asset 3. D. None of the above
B. Asset 2. Profit maximization goal assigns equal weights to current and future earnings. In this case, the total earnings generated by asset 2 are the highest.
18. Economic theories that the financial manager must be able to utilize for efficient business operations, include A. supply and demand analysis B. marginal analysis C. profit maximizing strategies D. price theory E. all of the above
E. all of the above
55. A corporation has a year end 2013 retained earnings (RE) balance of $220,000. The firm reported net profits after taxes of $50,000 in 2014 and paid dividends in 2014 of $30,000. The firm's retained earnings balance at year end 2014 is ______. A. $240,000 B. $250,000 C. $270,000 D. $300,000
A. $240,000 RE year-end balance = RE beginning balance + net income - dividends =220,000 + 50,000 - 30,000 = 240,000
28. The conflict between the goals of a firm's owners and the goals of its non-owner managers is A. the agency problem B. incompatibility C. serious only when profits decline D. of little importance in most large U.S. firms
A. the agency problem
47. Jennings, Inc. has a tax liability of $170,000 on pretax income of $500,000. What is the average tax rate for Jennings, Inc.? (Use the tax schedule rate in the text). A. 34 percent B. 46 percent C. 25 percent D. 40 percent
A. 34 percent Tax liability = 170,000/500,000 = 34%
34. Return and risk are the key determinants in share price. Increased risk, other things remaining the same, results in A. a lower share price B. a higher share price C. an unchanged share price D. an undetermined share price
A. a lower share price
57. Time series analysis is often used to A. assess developing trends B. correct errors of judgment C. reflect performance relative to some norm. D. standardize results
A. assess developing trends
25. The financial manager's investment decisions determine A. both the mix and the type of assets found on the firm's balance sheet B. both the mix and the type of liabilities found on the firm's balance sheet. C. both the mix and the type of assets and liabilities found on the firm's balance sheet. D. both the mix and the type of short-term and long-term financing
A. both the mix and the type of assets found on the firm's balance sheet
73. A firm with a gross profit margin which meets industry standard and a net profit margin which is below industry standard must have excessive A. general and administrative expenses B. cost of goods sold C. dividend payments D. principal payments
A. general and administrative expenses
80. A firm with a substandard return on total assets can improve its return on equity, all else remaining the same, by A. increasing its debt ratio B. increasing its total asset turnover C. decreasing its debt ratio D. decreasing its total asset turnover
A. increasing its debt ratio
9. Managerial finance A. involves tasks such as budgeting, financial forecasting, cash management, and funds procurement. B. involves the design and delivery of advice and financial products. C. recognizes funds on an accrual basis. D. devotes the majority of its attention to the collection and presentation of financial data.
A. involves tasks such as budgeting, financial forecasting, cash management, and funds procurement.
35. An ethics program is expected to have _____ impact on the firm's share price. A. positive B. negative C. no impact D. undetermined
A. positive
31. Profit maximization does NOT take into consideration A. risk and cash flow B. cash flow and stock price C. risk and EPS D. EPS and stock price.
A. risk and cash flow
53. Corporation A owns 15 percent of the stock of corporation B. Corporation B pays corporation A $100,000 in dividends in 2010. Corporation A must pay tax on A. $100,000 of ordinary income B. $ 30,000 of ordinary income C. $ 70,000 of ordinary income D. $ 70,000 of capital gain
B. $ 30,000 of ordinary income
8. Firm ABC has operating profits of $100,000, taxes of $17,000, interest expense of $34,000 and preferred dividends of $5,000. What is the firm's net profit after taxes? A. $66,000 B. $49,000 C. $44,000 D. $83,000
B. $49,000 Net profit after taxes = Operating profit - interest-taxes = 100,000-34,000-17,000 = $49,000
48. The average tax rate of a corporation with ordinary income of $105,000 and a tax liability of $24,200 is A. 46 percent. B. 23 percent (24,200/105,000). C. 34 percent. D. 15 percent.
B. 23 percent (24,200/105,000).
2. The rule setting body, which authorizes generally accepted accounting principles is A. GAAP. B. FASB. C. SEC. D. Federal Reserve System.
B. FASB.
61. ______ ratios are a measure of the speed with which various accounts are converted into cash A. Activity B. Liquidity C. Debt D. Profitability
B. Liquidity
51. ______ is used by financial managers as a structure for dissecting the firm's financial statements to assess its financial condition. A. Statement of cash flows B. The DuPont system of analysis C. A common size income statement D. Cross-sectional analysis
B. The DuPont system of analysis
79. A decrease in total asset turnover will result in ______ in the return on equity. A. an increase B. a decrease C. no change D. an undetermined change
B. a decrease
33. Return and risk are the key determinants in share price. Increased return results in _____, other things remaining the same. A. a lower share price B. a higher share price C. an unchanged share price D. an undetermined share price
B. a higher share price
59. An analysis in which the firm's ratio values are compared to those of a key competitor or group of competitors, primarily to identify areas for improvement is called A. time-series analysis B. benchmarking C. combined analysis D. None of the above
B. benchmarking
21. The primary emphasis of the financial manager is the use of A. accrued earnings. B. cash flow C. organization charts D. profit incentives
B. cash flow
29. Agency costs include all of the following EXCEPT A. bonding and structuring expenses B. cost of goods sold. C. monitoring expenditures D. managerial compensation
B. cost of goods sold.
5. Operating profits are defined as A. sales revenue minus cost of goods sold. B. earnings before interest and taxes C. earnings before depreciation and taxes D. earnings after tax
B. earnings before interest and taxes
30. The amount earned during the accounting period on each outstanding share of common stock is called A. common stock dividend B. earnings per share C. net profits after taxes. D. net income
B. earnings per share
32. Profit maximization fails because it ignores all EXCEPT A. the timing of returns B. earnings per share C. cash flows available to stockholders. D. risk
B. earnings per share
16. The controller is commonly responsible for A. managing cash B. financial accounting C. managing credit activities D. financial planning
B. financial accounting
76. The modified DuPont formula relates the firm's return on total assets (ROA) to the A. return on equity (ROE) B. financial leverage multiplier C. net profit margin D. total asset turnover
B. financial leverage multiplier
36. Return and risk A. have no effect on share price. B. have an inverse effect on share price. C. adversely affect share price. D. have the same effect on share price.
B. have an inverse effect on share price.
78. A firm with a substandard net profit margin can improve its return on total assets by A. increasing its debt ratio B. increasing its total asset turnover C. decreasing its fixed asset turnover D. decreasing its total asset turnover
B. increasing its total asset turnover
63. The ______ ratio may indicate the firm is experiencing stockouts and lost sales. A. average payment period B. inventory turnover C. average collection period D. quick
B. inventory turnover
17. The financial manager recognizes revenues and expenses utilizing A. the accrual method B. the actual inflows and outflows of cash C. the standardized, generally accepted, accounting principles D. the revenue method
B. the actual inflows and outflows of cash
65. If the inventory turnover is divided into 365, it becomes a measure of A. sales efficiency B. the average age of the inventory C. sales turnover D. the average collection period
B. the average age of the inventory
6. A firm has the following accounts and financial data for 2014: Sales Revenue $ 3,060 Cost of goods sold $1,800 Accounts Receivable 500 Preferred stock dividends 18 Interest expense 126 Tax rate 40% Operating expenses 600 Number of shares of common Accounts payable 240 stocks outstanding 1,000 The firm's earnings available to common shareholders for 2014 are ______. A. $224 B. $195 C. $302 D. $516
C. $302 Income Statement for 2014 (rounded to the nearest dollar) Sales $3,060 Less: Cost of goods sold 1,800 Gross Profit 1,260 Less: Operating expenses 600 Operating profit (EBIT) 660 Less: Interest 126 Profit before tax 534 Tax @ 40% 214 Net income (Income after tax) 320 Less: Preferred stock dividend 18 Earnings avail. to common stockholders 302 Note: Earnings before interest and taxes (EBIT) is also called operating profit.
7. A firm has the following accounts and financial data for 2014: Sales revenue $3,060 Cost of goods sold $1,800 Accounts receivable 500 Preferred stock dividends 18 Interest expense 126 Tax rate 40% Total operating expenses 600 Number of common shares Accounts payable 240 outstanding 1,000 The firm's net profit after taxes for 2014 is ______. A. $206 B. $213 C. $320 D. $206
C. $320 Income Statement for 2014 (rounded to the nearest dollar) Sales $3,060 Less: Cost of goods sold 1,800 Gross Profit 1,260 Less: Operating expenses 600 Operating profit (EBIT) 660 Less: Interest 126 Profit before tax 534 Tax @ 40% 214 Net income (Income after tax) 320
20. A firm has just ended its calendar year making a sale in the amount of $150,000 of merchandise purchased during the year at a total cost of $112,500. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are A. $0 and $150,000 respectively B. $37,500 and $150,000 respectively C. $37,500 and $112,500 respectively D. $150,000 and $112,500 respectively
C. $37,500 and $112,500 respectively Accrual basis Cash basis Revenue $150,000 $0 Cost of merchandise 112,500 112,500 Profit (loss) 37,500 -112,500
54. Candy Corporation has pretax profits of $1.2 million, an average tax rate of 34 percent, and it pays preferred dividends of $50,000. There are 100,000 shares outstanding and no interest expenses. What is Candy Corporation's earnings per share (EPS)? A. $3.91 B. $4.52 C. $7.42 D. $7.59
C. $7.42 EPS = Earnings available for common stockholders / # of shares outstanding = {[1,200,000(1-.34)]-50,000}/100,000 = $7.42
77. In the DuPont system, the return on equity is equal to A. (net profit margin) x (total asset turnover) B. (stockholders' equity) x (financial leverage multiplier) C. (return on total assets) x (financial leverage multiplier) D. (return on total assets) x (total asset turnover)
C. (return on total assets) x (financial leverage multiplier)
82. Indicate which of the following is true about annuities. A. An ordinary annuity is an equal payment paid or received at the beginning of each period. B. An annuity due is a payment paid or received at the beginning of each period that increases by an equal amount each period. C. An annuity due is an equal payment paid or received at the beginning of each period. D. An ordinary annuity is an equal payment paid or received at the end of each period that increases by an equal amount each period.
C. An annuity due is an equal payment paid or received at the beginning of each period.
1. The part of finance concerned with design and delivery of advice and financial products to individuals, business, and government is called A. Managerial Finance. B. Financial Manager. C. Financial Services. D. None of the above.
C. Financial Services.
3. Accounting practices and procedures used to prepare financial statements are called A. SEC. B. FASB. C. GAAP. D. IRB.
C. GAAP.
19. The primary economic principle used in managerial finance is A. supply and demand B. the liquidity trap. C. the crowding out effect D. marginal analysis
D. marginal analysis
49. If a corporation sells certain assets for more than their initial purchase price, the difference between the sale price and the purchase price is called A. an ordinary gain. B. a capital loss C. a capital gain D. an ordinary loss
C. a capital gain
22. Marginal analysis states that financial decisions should be made and actions taken only when A. demand equals supply. B. benefits equal costs. C. added benefits exceed added costs. D. added benefits are greater than zero.
C. added benefits exceed added costs.
24. Making financing decisions includes all of the following EXCEPT A. determining the appropriate mix of short-term and long-term financing B. deciding which individual short-term sources are best at a given point in time. C. analyzing quarterly budget and performance reports D. deciding which individual long-term sources are best at a given point in time.
C. analyzing quarterly budget and performance reports
62. The ______ is useful in evaluating credit and collection policies. A. average payment period B. current ratio C. average collection period D. current asset turnover
C. average collection period
52. Congress allows corporations to exclude from taxes 70 to 100 percent of dividends received from other corporations. Congress did this to A. encourage corporations to invest in each other B. avoid double taxation on dividends C. avoid triple taxation on dividends D. lower the cost of equity financing for corporations
C. avoid triple taxation on dividends
14. Which of the following legal forms of organization is characterized by limited liability? A. sole proprietorship B. partnership C. corporation D. professional partnership
C. corporation
10. Which of the following legal forms of organization is most expensive to organize? A. sole proprietorships. B. partnerships. C. corporations. D. limited partnership.
C. corporations.
13. All of the following are key strengths of a corporation EXCEPT A. access to capital markets B. limited liability. C. low organization costs. D. readily transferable ownership
C. low organization costs.
15. The treasurer is commonly responsible for A. taxes B. data processing C. making capital expenditures D. cost accounting
C. making capital expenditures
44. The two key financial markets are A. primary market and secondary market B. primary market and money market C. money market and capital market D. capital market and secondary market
C. money market and capital market
45. A capital gain occurs when an asset has been held for A. more than six months B. less than six months C. more than one year D. any length of time
C. more than one year
81. The three summary ratios basic to the DuPont system of analysis are A. net profit margin, total asset turnover, and return on investment. B. net profit margin, total asset turnover, and return on equity. C. net profit margin, total asset turnover, and equity multiplier. D. net profit margin, financial leverage multiplier, and return on equity.
C. net profit margin, total asset turnover, and equity multiplier.
72. The ______ measures the return on owners' investment in the firm. A. net profit margin B. price/earnings ratio C. return on equity D. return on total assets
C. return on equity
50. The DuPont system merges the income statement and balance sheet into two summary measures of profitability: A. net profit margin and return on total assets. B. net profit margin and return on equity. C. return on total assets and return on equity. D. net profit margin and price/earnings ratio.
C. return on total assets and return on equity.
40. The key participants in financial transactions are individuals, businesses, and governments. Individuals are net ______ of funds, and businesses are net ______ of funds. A. demanders; suppliers B. users; providers C. suppliers; demanders D. purchasers; sellers
C. suppliers; demanders
66. The higher the value of _____ ratio, the better able the firm is to fulfill its interest obligations. A. debt B. average collection period C. times interest earned D. average payment period
C. times interest earned
56. A firm has yearend 2013 and 2014 retained earnings balance of $670,000 and $560,000, respectively. The firm reported net profits after taxes of $100,000 in 2014. The firm paid dividends in 2014 of ______. A. $10,000 B. $100,000 C. $110,000 D. $210,000
D. $210,000 >Dividend paid = Beginning balance RE +Profit after taxes - RE ending balance= 670,000 + 100,000 - 560,000 = 210,000
46. The tax liability of a corporation with ordinary income of $105,000 is ______ (use the tax schedule rate in the text). A. $42,000 B. $35,700 C. $23,950 D. $24,200
D. $24,200
75. In the DuPont system, the return on total assets (asset) is equal to A. (return on equity)x(financial leverage multiplier). B. (return on equity)x(total asset turnover). C. (net profit margin)x(fixed asset turnover). D. (net profit margin)x(total asset turnover).
D. (net profit margin)x(total asset turnover).
74. A firm with sales of $1,000,000, net profits after taxes of $30,000, total assets of $1,500,000, and total liabilities of $750,000 has a return on equity of A. 20 percent. B. 15 percent. C. 3 percent. D. 4 percent.
D. 4 percent. ROE = Profit after taxes /Equity = 30,000/750,000 = 4%
64. ABC Corp. extends credit terms of 45 days to its customers. Its credit collection would be considered poor if its average collection period was A. 30 days. B. 36 days. C. 47 days. D. 57 days.
D. 57 days.
43. Firms that require funds from external sources can obtain them from A. private placement B. financial institutions C. financial markets D. All of the above
D. All of the above
4. The federal regulatory body governing the sale and listing of securities is called the A. IRS. B. FASB. C. GAAP. D. SEC.
D. SEC.
39. Which of the following is NOT a financial institution? A. a commercial bank B. an insurance company C. a pension fund D. a newspaper publisher
D. a newspaper publisher
11. Which of the following legal forms of organization's income is NOT taxed under individual income tax rate? A. sole proprietorships B. partnerships C. limited partnership D. corporation
D. corporation
12. Under which of the following legal forms of organization, is ownership readily transferable? A. sole proprietorships B. partnerships C. limited partnership D. corporation
D. corporation
41. The ______ is created by a financial relationship between suppliers and demanders of short-term funds. A. stock market B. capital market C. financial market D. money market
D. money market
23. Making investment decisions includes all of the following EXCEPT A. inventory B. fixed assets. C. accounts receivable D. notes payable
D. notes payable
60. Cross sectional ratio analysis is used to A. correct expected problems in operations B. isolate the causes of problems C. provide conclusive evidence of the existence of a problem D. reflect the symptoms of a possible problem
D. reflect the symptoms of a possible problem
37. As the risk of a stock investment increases A. return will increase. B. return will decrease. C. required rate of return will decrease. D. required rate of return will increase.
D. required rate of return will increase.
71. The ______ measures the overall effectiveness of management in generating profits with its available assets. A. net profit margin B. price/earnings ratio C. return on equity D. return on total assets
D. return on total assets
27. Wealth maximization as the goal of the firm implies enhancing the wealth of A. the Board of Directors B. the firm's employees C. the federal government D. the firm's stockholders
D. the firm's stockholders
26. In planning and managing the requirements of the firm, the financial manager is concerned with A. the mix and type of assets, but not the type of financing utilized. B. the type of financing utilized, but not the mix and type of assets. C. the acquisition of fixed assets, allowing someone else to plan the level of current assets required. D. the mix and type of assets, the type of financing utilized, and analysis in order to monitor the financial condition
D. the mix and type of assets, the type of financing utilized, and analysis in order to monitor the financial condition
58. The analyst should be careful when evaluating a ratio analysis that A. the overall performance of the firm is not judged on a single ratio. B. the dates of the financial statements being compared are the same. C. audited statements are used. D. the same accounting procedures were used. E. all of the above
E. all of the above