Finance 450 Quiz 1

corporation:

PTO limited liability, unlimited life

A firm has $728 in inventory, $1,365 in fixed assets, $473 in accounts receivable, $251 in net working capital, and $141 in cash. What is the amount of current liabilities?

$1091

agency problem:

is the conflict of interest between principal & agent. principal hires the agent to rep its interest stockholders higher managers to run the company

Given a profitable firm, depreciation:

lowers taxes.

is book value or market value more important?

market value. stockholders either lose/gain money when market value goes down/up

What is the goal of financial management

maximize the current value per share of the company's existing stock maximize the market value of the existing owner's equity

what is an income statement?

measures performance over a specified period of time net income = revenue - expenses "year ended"

what is NWC?

net working capital the difference between net worth and liabilities (the financing we have for day-to-day operations) current assets - current liabilities

problems with financial analysis:

no readily available comparables global competitors different accounting procedures different fiscal year end difference in capital structure seasonal variations and one-time events

primary vs secondary marketes:

none of the products from secondary market go to the company

The market value:

of an asset tends to provide a better guide to the actual worth of that asset than does the book value.

market value ratio

one of the five major ratios

profitability ratio

one of the five major ratios

financial leverage ratio

one of the five major ratios long-term solvency ratio the degree to which a company is utilizing borrowed money

liquidity ratio

one of the five major ratios short-term solvency keeping too much cash on hand is bad because it does not produce return **the bigger the ratio the better

asset management

one of the five major ratios turnover ratios inventory turnover days sales in inventory

the concept of cash flow:

one of the most important pieces of info that can be derived from financial statements

sole proprietorship:

one person 75% of all businesses [easy to start, least regulated, single owner keeps all the profits, taxed once as personal income] [limited to the life of the owner, equity capital limited to owner's personal wealth, unlimited liability, difficult to sell ownership interest]

do managers act in the shareholders interest?

pretty much yes. there are incentives like managerial compensation or threat of corporate control

determinants of growth:

profit margin total asset turnover financial leverage dividend policy

Financial statement analysis:

provides useful information that can serve as a basis for forecasting future performance.

market value:

the TRUE value. the price at which the assets, liabilities, or equity can actually be bought/sold

book value:

the balance sheet value of the assets, liabilities, & equity

(T/F) The balance sheet presents a snapshot of the firm's assets and liabilities at one particular moment

true

(T/F) The difference between the market value of assets and liabilities is the market value of the shareholders' equity claim

true

partnership:

two or more people [more capital available, relatively easy to start, income taxed once as personal income] [unlimited liability, partnership dissolves when a person dies or wants to sell, difficult to transfer ownership]

capital budgeting:

what long term investments/projects should the business take on? not easy decision to reverse

(T/F) A company may deduct the interest paid to debtholders and the dividends paid to shareholders when calculating its taxable income

False

The DuPont identity can be used to help a financial manager determine the: I. degree of financial leverage used by a firm. II. operating efficiency of a firm. III. utilization rate of a firm's assets. IV. rate of return on a firm's assets.

I, II, III, and IV

A firm's liquidity level decreases when:

inventory is purchased with cash.

A common-size balance sheet helps financial managers determine:

if changes are occurring in a firm's mix of assets.

What are the basic areas of finance?

- corporate finance - investments - financial institutions - international finance

5 major categories of financial ratios:

1. liquidity ratio (short-term) 2. financial leverage ratio (long-term solvency ratio) 3. asset management (turnover ratio) 4. profitability ratio 5. market value ratio

What is finance?

CASH FLOW more value > less sooner cash is received the more value it has less risky assets are more valuable than risky assets

You would like to borrow money three years from now to build a new building. In preparation for applying for that loan, you are in the process of developing target ratios for your firm. Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future?

Cash coverage ratio = 2.6; debt-equity ratio = .3

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0.

Cash payment of an account payable `

Donovan's would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal?

Dividend payout ratio

Which of the following is true? A. Depreciation has no effect on taxes. B. Taxable income equals net income divided by (1 + Average tax rate). C. Interest paid is a noncash item. D. Taxable income must be a positive value. E. Net income is distributed either to dividends or retained earnings.

E. Net income is distributed either to dividends or retained earnings

Which one of the following decreases net income but does not affect the operating cash flow of a firm that owes no taxes for the current year?

Noncash item

the DuPont Identity:

ROE

(T/F) One reason for the difference between profits and cash is that the cost of capital equipment is spread over the forecast life

True

what is a balance sheet?

a snapshot of the firms assets & liabilities at a GIVEN POINT IN TIME (very specific date)

3 main financial management decisions

capital budgeting capital structure working capital management

Cash flow from assets equals:

cash flow to creditors − cash flow to stockholders

(T/F) If the market value of assets is high, then the market value of liabilities must be high also

false

What is the tole of the financial manager within the firm?

financial managers try to answer: what long term investments should the firm take on; where will we get the long term financing; how will we manage the everyday financial activities of the firm?

profit margin:

goes in the DuPont Identity measures a firms operating efficiency how well does the firm control costs

total asset turnover:

goes in the DuPont Identity measures the firms asset use efficiency how well does it manage its assets?

equity multiplier:

goes in the DuPont Identity measures the firms financial leverage EM = TA / TE = 1 + D/E ratio

working capital management:

how do we manage the day-to-day finances of the firm?

capital structure:

how much debt/equity we use to finance our assets - how should we pay for our assets? should we use debt/equity?

internal growth rate:

how much the firm can grow assets using retained earnings as the only source of financing [ROA x b / 1 - ROA x b]

sustainable growth rate:

how much the firm can grow by using internally generated funds and issuing debt to maintain a constant debt ratio [ROE x b / 1 - ROE x b]