Finance 4010 Exam 1

Other things held constant, if a firm holds cash balances in excess their optimal level in a non-interest bearing account, this will tend to lower the firms A. Profit margin B. Total asset turnover C. return on equity D. all of the above E. answers B and C above

E. Answers B and C above

We can use the fixed asset turnover ratio to legitimately compare firms in different industries as long as all the firms being compared are using the same proportion of fixed assets to total assets.

False

Which of the following statements are correct? I. US CEOs are paid much more than CEOs in other countries. II. A large fraction of compensation for US CEOs comes from stock-option grants III. Stock-option grants give the manager a certain number of shares delivered at annual intervals, usually over five years IV. US accounting rules now require recognition of the value of stock-option grants as a compensation expense

I, II, and IV only

Which of the following is correct regarding corporate governance around the world? I. The United-States has a market-based financial system while European countries & Japan have a bank-based Financial System. II. In Japan, it is easier for shareholders to nominate and elect directors than in the US. III. All else being equal, the more tiers there are in the pyramid, the more shares you need to control an operating company IV. Dual-class equity is forbidden in Spain

I,II, and IV only

If you are developing a financial plan for a corporation. Which of the following questions will be considered as you develop your plan? I. How much net working capital will be needed? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained?

I,II,III, and IV

Which of the following statements are correct regarding Sarbanes-Oxley (SOX) and Dodd-Frank (DF)? I. DF requires that public firms offer an advisory vote to shareholders on top executive compensation. II.SOX imposes criminal penalties on whistleblowers III. The compliance cost for SOX can be substantial and encourage some firms to "go dark" IV. DF requires companies to disclose whether directors and officers are permitted to hold put options which protect their ownership position in the firm

I,II,III, and IV

Which of the following are included in the market value of a firm but are excluded from the firm's book value? I. value of management skills II. Value of a copyright III. Value of the firm's reputation IV. value of employees experience

I,III, and IV only

Which of the following statements are correct? I. An agency cost is the value lost when managers do not act to maximize shareholder wealth but is reduced by the amount of the cost borne by outside shareholders to monitoring and control the CEO. II. Empire building refers to the initiation of capital budgeting projects with the aim of investing for size, not shareholder wealth and is often a prediction of the free cash flow hypothesis. One resolution to this problem is to issue debt rather than equity when the need for capital arises. III. In an entrenching investment, managers choose or design investment projects that increase their own value to the firm thereby making them more difficult to fire. IV. In the free-rider problem, when one shareholder (or group of shareholders) acts to monitor and control management, all shareholders benefit.

II,III, and IV only

Brady Exports, Inc. determined that they need external financing. Which of the following is true in regards to accounts of external financing the company needs?

If the Brady Exports is profitable, then some amount from financing can be obtained through retention of earnings

Which of the following is correct in relation to pro forma statements?

Inventory changes are directly proportionate to sales changes

If your goal is to determine how effectively a firm is managing its assets, which of the following sets of ratios would you examine?

Inventory turnover ration, days sales outstanding, fixed assets turnover ratio

Michael Scott is the owner of the Michael Scott paper company, which is a sole proprietorship. The firm cannot pay its bills because a large customer defaulted on payment. Which one of the following statements is correct given the situation?

Michael is personally liable for the entire debt of the Michael Scott Paper Company

Which of the following describes how the "modern" Corporation is governed?

Professional managers, typically with small shareholdings, and large diffuse public floats.

T-pain is the capital budgeting manager of Lonely Islands Inc. and is faced with selecting from the following independent projects: (investment, NPV, PI) Boat: $10M, $141M, 2.41 Mermaid: $25M, $48M, 2.91 Poseidon: $50M, $68M, 2.36 Buoy: $25M, $39 M, 2.55 Titanic: $200M, -$45M, 0.77 If Mr.Pain has a CAPX budget of $150M, which projects should he choose?

Project Boat, Mermaid, and Buoy

Applying the discounted payback decision rule to all projects may cause:

Some positive net present value projects to be rejected

If a project has a net present value equal to zero, then:

The project earns a return exactly equal to the discount rate

The purpose of long-term solvency measure is?

To indicate the firm's ability to meet its long-run obligations

Which of the following is a use of cash? Increase in notes payable decrease in inventory increase in long-term debt decrease in accounts receivable decrease in common stock

decrease in common stock