Final Prep Assessment - Theory

Which of the following items from a company's financial statement is considered a non-cash expense? Depreciation Amortization Taxes A & B A & C

Answer: A & B

The decision rule for the IRR states that when the IRR is greater than ______________ the project should be accepted. The discount rate The rate of return required by providers of capital The WACC All of the Above None of the Above

Answer: All of the Above

The income statements for Firm A and Firm B have identical sales , identical costs and expenses, and identical tax rates. However, the only difference between the firms' income statements is that Firm B has twice the depreciation of Firm A. Given this information, Firm A will have higher __________ than Firm B. Net Income Taxes Earnings Before Interest and Taxes None of the above All of the above

Answer: All of the above

What is the definition of a non-spontaneous account: An account that changes in proportion of sales An account that does not vary when sales are changed An account that allows firms to experience non-cash expenses such as depreciation An account that provides information about the return required by share holders None of the above

Answer: An account that does not vary when sales are changed

Bond STQ has duration of 2. Given this information, a one percent increase in the return required by bond holders will: Increase the bond price by 2% Decrease the bond price by 2% Increase the coupon rate by 2% Decrease the coupon rate by 2% None of the above

Answer: Decrease the bond price by 2%

Firm A has a fixed asset turnover ratio of 1.32 while Firm B has a fixed asset turnover ratio of 1.55. Given this information, which of the following conclusions can be made? Firm B is considered more efficient than Firm A Firm A is considered more efficient that Firm B Firm A is turning fixed assets into sales at a greater rate than Firm B A & C B & C

Answer: Firm B is considered more efficient than Firm A

When examining capacity constraints to determine whether the discretionary financing need can be reduced, which spontaneous account should be looked at first? Fixed Assets Notes Payable Accounts Payable Accounts Receivable None of the above

Answer: Fixed Assets

A firm has a debt ratio of 0.50. Which of the following is true? For every dollar of assets, the firm has $0.33 of equity The firm is financing with 33% debt and 66% equity For every dollar of assets the firm has $0.50 of liabilities All of the above None of the above

Answer: For every dollar of assets the firm has $0.50 of liabilities

Holding all else equal, an increase in net margin will: Decrease the leverage multiplier Increase the debt ratio Decrease ROE Increase ROE None of the above

Answer: Increase ROE

If returns required by bond holders have decreased 1% from last year, we should expect bond prices to have _______________. Increased Decreased Remain unchanged Decreased by more than 1% None of the above

Answer: Increased

Which of the following is frequently considered a spontaneous account? Long-term debt Notes payable Inventory All of the above None of the above

Answer: Inventory

UHT Company has a current ratio of 5.2 and a quick ratio of 4.9. The average firm in the industry has a current ratio of 6.7 and a quick ratio of 5.4. Given this information, UHT is: Less liquid than the industry average More liquid than the industry average Cannot tell from the information Suffering from higher costs None of the Above

Answer: Less liquid than the industry average

Which of the following steps in the percent of sales method comes after calculating discretionary financing need? Deal with discretionary accounts Project sales and expenses Calculate retained earnings Forecast change in spontaneous balance sheet accounts None of the above

Answer: None of the above

The Control Premium occurs because _____________________. Public firms have a more difficult time controlling future inflows Private firms control more of the market share than public firms Owners of public firms generally have less managerial control than owners of private firms Public firms cannot control which investors purchase shares of their ownership None of the Above

Answer: Owners of public firms generally have less managerial control than owners of private firms

The Liquidity Discount occurs because _______________. Public companies have an easier ability to turn assets into cash Private companies have an easier ability to turn assets into cash The share prices of public firms are more volatile than the variability of private firm's cash flows Ownership in private companies is less liquid than ownership in public companies None of the Above

Answer: Ownership in private companies is less liquid than ownership in public companies

Which of the following statements correctly defines the difference between preferred stock and common stock? Preferred share holders have more of a claim to dividends than common stock holders Preferred share holders have the voting rights that common stock holders have Preferred share holders have more exposure to variable share prices than common share holders All of the Above None of the Above

Answer: Preferred share holders have more of a claim to dividends than common stock holders

Before forecasting a change in spontaneous balance sheet accounts, a firm must: Calculate retained earnings Project sales revenue and expenses Determine total financing needs Deal with Discretionary accounts None of the above

Answer: Project sales revenue and expenses

Which of the following is true regarding the Return on Equity (ROE) ratio? ROE is an important measure of management's effectiveness on the firm's profitability ROE is easier to compare across firms than ROA because it is independent of the firm's financing policy ROE is negatively related to the firm's ability to turn assets into sales ROE is unrelated to the firm's net profit margin None of the Above

Answer: ROE is an important measure of management's effectiveness on the firm's profitability

Which of the following is an ideal criteria for the methods used to evaluate a capital investment project? The method should consider the timing of the project's cash flows The method must account for the success of previous projects All cash flows should be included, which might consist of opportunity costs, sunk costs, and cannibalization costs The method should set required risk to be constant for all projects that will be considered None of the Above

Answer: The method should consider the timing of the project's cash flows

Which of the following statements does not correctly define an element of the replacement cost method for valuing a firm? The replacement cost method attempts to determine the cost of replacing inefficient capital budging methods with efficient capital budget methods The replacement cost method attempts to determine the cost of replacing the company's capital structure The replacement cost method attempts to determine the cost of replacing the company's liabilities The replacement cost method attempts to determine the cost of replacing the company's assets None of the Above

Answer: The replacement cost method attempts to determine the cost of replacing inefficient capital budging methods with efficient capital budget methods