Finance 1.5 - CHAPTER 1 + 2

An investment is said to be liquid if the investment A) has large day to day fluctuations in price. B) has a large bid-ask spread. C) can easily be converted into cash. D) is traded on a stock exchange

C)

If Moon Corporation has an increase in sales, which of the following would result in no change in its EBIT margin? A) A proportional increase in its net income B) A proportional decrease in its EBIT C) A proportional increase in its EBIT D) An increase in its operating expenses

C)

In addition to the balance sheet, income statement, and the statement of cash flows, a firm's complete financial statements will include all of the following except: A) Management discussion and Analysis B) Notes to the financial statements C) Securities and Exchange Commission's (SEC) commentary D) Statement of stockholders' equity

C)

The Principal-Agent Problem arises A) because managers have little incentive to work in the interest of shareholders when this means working against their own self-interest. B) because of the separation of ownership and control in a corporation. C) Both A and B D) None of the above

C)

Which of the following adjustments to net income is not correct if you are trying to calculate cash flow from operating activities? A) Add increases in accounts payable B) Add back depreciation C) Add increases in accounts receivable D) Deduct increases in inventory

C)

Which of the following statements regarding net income transferred to retained earnings is correct? A) Net income = net income transferred to retained earnings - dividends B) Net income transferred to retain earnings = net income + dividends C) Net income = net income transferred to retain earnings + dividends D) Net income transferred to retain earnings - net income = dividends

C)

You are a shareholder in a "C" corporation. This corporation earns $4 per share before taxes. After it has paid taxes, it will distribute the remainder of its earnings to you as a dividend. The dividend is income to you, so you will then pay taxes on these earnings. The corporate tax rate is 35% and your tax rate on dividend income is 15%. The effective tax rate on your share of the corporations earnings is closest to: A) 15% B) 35% C) 45% D) 50%

C)

Dustin's Donuts experienced a decrease in the value of the trademark of a company it acquired two years ago. This reduction in value results in A) an impairment charge. B) depreciation expense. C) an operating expense. D) goodwill.

A)

If Alex Corporation takes out a bank loan to purchase a machine used in production and everything else stays the same, its equity multiplier will ________, and its ROE will ________. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase

A)

If Firm A and Firm B are in the same industry and use the same production method, and Firm A's asset turnover is higher than that of Firm B, then all else equal we can conclude A) Firm A is more efficient than Firm B. B) Firm A has a lower dollar amount of assets than Firm B. C) Firm A has higher sales than Firm B. D) Firm A has a lower ROE than Firm B

A)

Off-balance sheet transactions are required to be disclosed A) in the management discussion and analysis. B) in the auditor's report. C) in the Securities and Exchange Commission's commentary. D) in the statement of stockholders' equity

A)

The Sarbanes-Oxley Act (SOX) stiffened penalties for providing false information by A) requiring the CEO and CFO to return bonuses or profits from the sale of stock that are later shown to be due to misstated financial reports. B) imposing large compliance costs on small companies. C) requiring auditing firms to have long-standing relationships with their clients and receive lucrative auditing and consulting fees from them. D) putting strict limits on the amount of non-audit fees (consulting or otherwise) that an accounting firm can earn from a firm that it audits.

A)

The statement of financial position is also known as the A) balance sheet. B) income statement. C) statement of cash flows. D) statement of stockholder's equity.

A)

Which of the following is not a reason why cash flow may not equal net income? A) Amortization is added in when calculating net income. B) Changes in inventory will change cash flows but not income. C) Capital expenditures are not recorded on the income statement. D) Depreciation is deducted when calculating net income

A)

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)

If Moon Corporation's gross margin declined, which of the following is true? A) Its cost of goods sold increased. B) Its cost of goods sold as a percent of sales increased. C) Its sales increased D) Its net profit margin was unaffected by the decline

B)

Suppose Novak Company experienced a reduction in its ROE over the last year. This fall could be attributed to A) an increase in Net Profit Margin. B) a decrease in Asset Turnover. C) an increase in Leverage. D) a decrease in Equity.

B)

Which of the following statements is false? A) On Nasdaq, stocks can and do have multiple market makers who compete with each other. Each market maker must post bid and ask prices in the Nasdaq network where they can be viewed by all participants. B) Bid prices exceed ask prices. C) Because customers always buy at the ask and sell at the bid, the bid-ask spread is a transaction cost investors have to pay in order to trade. D) On the floor of the NYSE, market makers (known on the NYSE as specialists) match buyers and sellers

B)

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

D)

An agency problem can be alleviated by: A) requiring all firms to be sole proprietorships. B) compensating managers in such a way that acting in the best interest of shareholders is also in the best interest of managers. C) asking managers to take on more risk than they are comfortable taking. D) A and B

D)

The Sarbanes-Oxley Act (SOX) forced companies to validate their internal financial control processes by A) putting strict limits on the amount of non-audit fees (consulting or otherwise) that an accounting firm canearn from a firm that it audits. B) requiring the CEO and CFO to return bonuses or profits from the sale of stock that are later shown to be due to misstated financial reports. C) requiring auditing firms to have long-standing relationships with their clients and receive lucrative auditing and consulting fees from them. D) requiring senior management and the boards of public companies to validate and certify the process through which funds are allocated and controlled.

D)

The Sarbanes-Oxley Act (SOX) overhauled incentives and the independence in the auditing process by A) requiring the CEO and CFO to return bonuses or profits from the sale of stock that are later shown to be due to misstated financial reports. B) imposing large compliance costs on small companies. C) requiring auditing firms to have long-standing relationships with their clients and receive lucrative auditing and consulting fees from them. D) putting strict limits on the amount of non-audit fees (consulting or otherwise) that an accounting firm can earn from a firm that it audits.

D)

The largest stock market in the world is A) the London Stock Exchange. B) NASDAQ. C) the American Stock Exchange. D) the New York Stock Exchange

D)

Which of the following is an example of an intangible asset? A) Brand names and trademarks B) Patents C) Customer relationships D) All of the above are intangible assets

D)

Which of the following statements is false? A) In bankruptcy, management is given the opportunity to reorganize the firm and renegotiate with debt holders. B) Because a corporation is a separate legal entity, when it fails to repay its debts, the people who lent to the firm, the debt holders are entitled to seize the assets of the corporation in compensation for the default. C) As long as the corporation can satisfy the claims of the debt holders, ownership remains in the hands of the equity holders. D) If the corporation fails to satisfy debt holders' claims, debt holders may lose control of the firm

D)