Fin 3300 Chapter 1-4

One disadvantage of forming a corporation rather than a partnership is that this makes it more difficult for the firm's investors to transfer their ownership interests a. True b. False

False

A disadvantage of the corporate form of organization is that corporate stockholders are more exposed to personal liabilities in the event of bankruptcy than are investors in a typical partnership. a. True b. False

False

An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships. a. True b. False

False

Companies typically provide four basic financial statements: the fixed income statement, the current income statement, the balance sheet, and the cash flow statement. a. True b. False

False

High current and quick ratios always indicate that the firm is managing its liquidity position well. a. True b. False

False

If a corporation elects to be taxed as an S corporation, then both it and its stockholders can avoid all Federal taxes. This provision was put into the federal lax Code in order to encourage the formation or small businesses. a. True b. False

False

If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change. a. True b. False

False

If a stock's intrinsic value is greater than its market price, then the stock is overvalued and should be sold True b. False

False

If a stock's market price is above its intrinsic value, then the stock can be thought of as being undervalued, and it would be a good buy. a. True b. False

False

In general, it's better to have a low inventory turnover ratio than a high one, as a low ratio indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock. a. True b. False

False

One problem with ratio analysis is that relationships can sometimes be manipulated. For example, if our current ratio is greater than 1.5, then borrowing on a short-term basis and using the funds to build up our cash account would cause the current ratio to INCREASE. a. True b. False

False

Other things held constant, a decline in sales accompanied by an increase in financial leverage must result in a lower profit margin. a. True b. False

False

Other things held constant, the more debt a firm uses, the lower its operating margin will be. a. True b. False

False

The NYSE is defined as a "primary" market because it is one of the largest and most important stock markets in the world. a. True b. False

False

The basic earning power ratio (BEP) reflects the earning power of a firm's assets after giving consideration to financial leverage and tax effects. a. True b. False

False

The return on common equity (ROE) is generally regarded as being less significant, from a stockholder's viewpoint, than the return on total assets (ROA). a. True b. False

False

The term IPO stands for "individual purchase order," as when an individual (as opposed to an institution) places an order to buy a stock. a True b. False

False

A stock's market price would equal its intrinsic value if all investors had all the information that is available about the stock. In this case the stock's market price would equal its intrinsic value. a. True b. False

True

Free cash flow (FCF) is, essentially, the cash flow that is available for interest and dividends after the company has made the investments in current and fixed assets that are necessary to sustain ongoing operations. a. True b. False

True

If a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. However, its stockholders will have to pay personal taxes on the firm's net income. a. True b. False

True

If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would increase. a. True b. False

True

If we were describing the income statement and the balance sheet, it would be correct to say that the income statement is more like a video while the balance sheet is more like a snapshot. a. True b. False

True

Net operating working capital is equal to current assets minus the difference between current liabilities and notes payable. This definition assumes that the firm has no "excess" cash.​ a. True b. False

True

Other things held constant, the more debt a firm uses, the lower its profit margin will be. a. True b. False

True

Partnerships and proprietorships generally have a tax advantage over corporations. a. True b. False

True

Suppose Firms A and B have the same amount of assets, total assets are equal to total invested capital, pay the same interest rate on their debt, have the same basic earning power (BEP), finance with only debt and common equity, and have the same tax rate. However, Firm A has a higher debt to capital ratio. If BEP is greater than the interest rate on debt, Firm A will have a higher ROE as a result of its higher debt ratio. a. True b. False

True

Suppose a firm wants to maintain a specific TIE ratio. It knows the amount of its debt, the interest rate on that debt, the applicable tax rate, and its operating costs. With this information, the firm can calculate the amount of sales required to achieve its target TIE ratio. a. True b. False

True

The annual report contains four basic financial statements: the income statement, the balance sheet, the cash flow statement, and statement of stockholders' equity. a. True b. False

True

The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of the stockholders' claim against the firm's existing assets. Put another way retained earnings are stockholders' reinvested earnings. a. True b. False

True

The return on invested capital (ROIC) differs from the return on assets (ROA). First, ROIC is based on total invested capital rather than total assets. Second, the numerator of the ROIC is after-tax operating income rather than net income. a. True b. False

True

You recently sold 200 shares of Disney stock, and the transfer was made through a broker. This is an example of: a. A money market transaction. b. A primary market transaction. c. A secondary market transaction. d. A futures market transaction. e. An over-the-counter market transaction.

c. A secondary market transaction.

Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. This action had no effect on the company's total assets or operating income. Which of the following effects would occur as a result of this action? a. The company's current ratio increased. b. The company's times interest earned ratio decreased. c. The company's basic earning power ratio increased. d. The company's equity multiplier increased. e. The company's total debt to total capital ratio increased.

a. The company's current ratio increased.

Which of the following actions would be most likely to reduce potential conflicts between stockholders and bondholders? a. Including restrictive covenants in the company's bond indenture (which is the contract between the company and its bondholders). b. Compensating managers with more stock options and less cash income. The passage of laws that make it harder for hostile takeovers to succeed. d. A government regulation that banned the use of convertible bonds. e. The firm begins to use only long-term debt, e.g., debt that matures in 30 years or more, rather than debt that matures in less than one year.

a. Including restrictive covenants in the company's bond indenture (which is the contract between the company and its bondholders).

You recently sold 100 shares of Microsoft stock to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following best describes this transaction? a. This is an example of a direct transfer of capital. b. This is an example of a primary market transaction. c. This is an example of an exchange of physical assets d. This is an example of a money market transaction This is an example of a derivative market transaction

a. This is an example of a direct transfer of capital.

Amram Company's current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio? a. Borrow using short-term notes payable and use the proceeds to reduce accruals. b. Borrow using short-term notes payable and use the proceeds to reduce long-term debt. c. Use cash to reduce accruals. d. Use cash to reduce short-term notes payable. e. Use cash to reduce accounts payable.

b. Borrow using short-term notes payable and use the proceeds to reduce long-term debt.

Which of the following statements is CORRECT? a. If Firms X and Y have the same P/E ratios, then their market-to-book ratios must also be equal. b. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same. c. If Firms X and Y have the same earnings per share and market-to-book ratio, they must have the same price/earnings ratio. d. If Firm X's P/E ratio exceeds that of Firm Y, then Y is likely to be less risky and/or be expected to grow at a faster rate. e. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their market-to-book ratios must also be the same.

b. If Firms X and Y have the same net income, number of shares outstanding, and price per share, then their P/E ratios must also be the same.

Which of the following statements is CORRECT? a. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity. b. The balance sheet gives us a picture of the firm's financial position at a point in time. c. The income statement gives us a picture of the firm's financial position at a point in time. d. The statement of cash flows tells us how much cash the firm must pay out in interest during the year. e. The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.

b. The balance sheet gives us a picture of the firm's financial position at a point in time.

Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet? a. ​The company repurchases common stock. b. ​The company pays a dividend. c. ​The company issues new common stock. d. ​The company gives customers more time to pay their bills. e. ​The company purchases a new piece of equipment.

c. ​The company issues new common stock.

Which of the following items is NOT normally considered to be a current asset? a. Accounts receivable. b. Inventory. c. Bonds. d. Cash. e. Short-term, highly-liquid, marketable securities.

c. Bonds

Which of the following statements is CORRECT? a. One of the advantages of the corporate form of organization is that it avoids double taxation. b. It is easier to transfer one's ownership interest in a partnership than in a corporation. c. One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability. d. One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.c.,"one person, one vote. d. Corporations of all types are subject to the corporate income tax.

c. One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability.

Considered alone, which of the following would increase a company's current ratio? a. An increase in net fixed assets. b. An increase in accrued liabilities. c. An increase in notes payable. d. An increase in accounts receivable. e. An increase in accounts payable.

d. An increase in accounts receivable.

The CFO of Daves Industries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of its outstanding bonds that carry a 7% interest rate. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur? a. The company's taxable income would fall. b. The company's interest expense would remain constant. c. The company would have less common equity than before. d. The company's net income would increase. e. The company would have to pay less taxes.

d. The company's net income would increase.

Which of the following mechanisms would be most likely to help motivate managers to act in the best interests of shareholders? a. Decrease the use of restrictive covenants in bond agreements. b. Take actions that reduce the possibility of a hostile takeover. c. Elect a board of directors that allows managers greater freedom of action. d. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries. e. Eliminate a requirement that members of the board of directors have a substantial investment in the firm's stock.

d. Increase the proportion of executive compensation that comes from stock options and reduce the proportion that is paid as cash salaries.

Companies HD and LD have the same tax rate, sales, total assets, and basic earning power. Both companies have positive net incomes. Both firms finance using only debt and common equity and total assets equal total invested capital. Company HD has a higher total debt to total capital ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT? a. Company HD has a lower equity multiplier. b. Company HD has more net income. c. Company HD pays more in taxes. d. Company HD has a lower ROE. e. Company HD has a lower times-interest-earned (TIE) ratio.

e. Company HD has a lower times-interest-earned (TIE) ratio.

On its 12/31/15 balance sheet, Barnes Inc showed $510 million of retained earnings, and exactly that same amount was shown the following year. Assuming that no earnings restatements were issued, which of the following statements is CORRECT? a. If the company lost money in 2015, it must have paid dividends. b. The company must have had zero net income in 2015. c. The company must have paid out half of its 2015 earnings as dividends. d. The company must have paid no dividends in 2015. e. Dividends could have been paid in 2015, but they would have had to equal the earnings for the year.

e. Dividends could have been paid in 2015, but they would have had to equal the earnings for the year.

Money markets are markets for a. Foreign currencies. b. Consumer automobile loans. c. Common stocks. d. Long-term bonds. e. Short-term debt securities such as Treasury bills and commercial paper.

e. Short-term debt securities such as Treasury bills and commercial paper.

Which of the following could explain why a business might choose to operate as a corporation rather than as a proprietorship or a partnership? a. Corporations generally face fewer regulations. b. Less of a corporation's income is generally subject to federal taxes. c. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation. d. Corporate investors are exposed to unlimited liability. e. Corporations generally find it casier to raise large amounts of capital.

e. Corporations generally find it casier to raise large amounts of capital.

Which of the following statements is CORRECT? a. One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy. b. Proprietorships are subject to more regulations than corporations. c. In any partnership, every partner has the same rights, privileges, and liability exposure as ever other Dartner. d. Corporations of all types are subject to the corporate income tax. e. Proprietorships and partnerships generally have a tax advantage over corporations

e. Proprietorships and partnerships generally have a tax advantage over corporations

Which of the following actions would be likely to reduce potential conflicts of interest between stockholders and managers? a. Congress passes a law that severely restricts hostile takeovers b. A firm's compensation system is changed so that managers receive larger cash salaries but fewer long-term options to buy Stock c. The company changes the way executive stock options are handled, with all options awarded vest 2 years rather than having 20% of the options awarded vest every 2 years over a 10-year period d. The company's outside auditing firm is given a lucrative year-by-year consulting contract with the company e. The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash.

e. The composition of the board of directors is changed from all inside directors to all outside directors, and the directors are compensated with stock rather than cash.