Finance

2. A business owned by a solitary individual who has unlimited liability for its debt is called a: A. Corporation. B. Sole proprietorship. C. General partnership. D. Limited partnership. E. Limited liability Company.

B. Sole Proprietorship

5. Which one of the following is a capital structure decision? A. Determining which one of two projects to accept. B. Determining how to allocate investment funds to multiple projects. C. Determining the amount of funds needed to finance customer purchases of a new product. D. Determining how much debt should be assumed to fund a project. E. Determining how much inventory will be needed to support a project.

D. Determining how much debt should be assumed to fund a project.

13. Which one of the following statements concerning net working capital is correct? A. Net working capital increases when inventory is purchased with cash. B. Net working capital excludes inventory. C. Total assets must increase if net working capital increases. D. Net working capital may be a negative value. E. Net working capital is the amount of cash a firm currently has available for spending.

D. Net working capital may be a negative value.

14. Which one of the following statements related to an income statement is correct? A. Interest expense increases the amount of tax due. B. Depreciation does not affect taxes since it is a non-cash expense. C. Net income is distributed to dividends and paid-in surplus. D. Taxes reduce both net income and operating cash flow. E. Interest expense is included in operating cash flow.

D. Taxes reduce both net income and operating cash flow.

Word

Word

22. The Daily News had net income of $121,600 of which 40 percent was distributed to the shareholders as dividends. During the year, the company sold $75,000 worth of common stock. What is the cash flow to stockholders? A. -$75,000 B. -$26,360 C. -$2,040 D. $123,640 E. $147,960

B. -26,360 Cash flow to stockholders = .40($121,600) - $75,000 = -$26,360

30. If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following? A. 0 B. .5 C. 1.0 D. 1.5 E. 2.0

B. .5 Let Total Debt = $100; Then Total Equity = $100. This means Total Asset = $200. Total Debt Ratio = Total Debt/Total Asset = 100/200 = 0.50.

28. A firm's balance sheet showed beginning net fixed assets of $3.6 million, and ending net fixed assets of $3.4 million. The depreciation expense is $900,000. What was the net capital spending for the year? A. $500,000 B. $400,000 C. $700,000 D. $1,100,000 E. $1,300,000

C 700,000 Net capital spending = $3,400,000 - 3,600,000 + 900,000 = $700,000

17. A firm has common stock of $6,200, paid-in surplus of $9,100, total liabilities of $8,400, current assets of $5,900, and fixed assets of $21,200. What is the amount of the shareholders' equity? A. $6,900 B. $15,300 C. $18,700 D. $23,700 E. $35,500

C. 18,700 Shareholders' equity = $5,900 + 21,200 - 8,400 = $18,700 (Note: The amount of retained earnings is not provided, so you must use total assets minus total liabilities to derive the correct answer.)

4. Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers? A. Articles of incorporation. B. Corporate breakdown. C. Agency problem. D. Bylaws. E. Legal liability.

C. Agency Problem

9. Why should financial managers strive to maximize the current value per share of the existing stock? A. Doing so guarantees the company will grow in size at the maximum possible rate. B. Doing so increases employee salaries. C. Because they have been hired to represent the interests of the current shareholders. D. Because this will increase the current dividends per share. E. Because managers often receive shares of stock as part of their compensation

C. Because they have been hired to represent the interests of the current shareholders.

8. Which one of the following statements is correct? A. The majority of firms in the U.S. are structured as corporations. B. Corporate profits are taxable income to the shareholders when earned. C. Corporations can raise large amounts of capital generally easier than partnerships can. D. Stockholders face no potential losses related to their corporate investment. E. Corporate shareholders elect the corporate president.

C. Corporations can raise large amounts of capital generally easier than partnerships can.

33. Duke's Garage has cash of $68, accounts receivable of $142, accounts payable of $235, and inventory of $318. What is the value of the quick ratio? A. 2.25 B. .53 C. .71 D. .89 E. 1.35

D. .89 Quick ratio = ($68 + 142) / $235 = .89

3. Which one of the following terms is defined as the management of a firm's long-term investments? A. Working capital management. B. Financial allocation. C. Agency cost analysis. D. Capital budgeting. E. Capital structure.

D. Capital Budgeting

12. The cash flow of a firm that is available for distribution to the firm's creditors and stockholders is called the: A. Operating cash flow. B. Net capital spending. C. Net working capital. D. Cash flow from assets. E. Cash flow to stockholders.

D. Cash flow from assets.

16. A firm has net working capital of $560. Long-term debt is $3,970, total assets are $7,390, and fixed assets are $3,910. What is the amount of the total liabilities? A. $2,050 B. $2,920 C. $4,130 D. $7,950 E. $6,890

E. $6,890 Current assets = $7,390 - 3,910 = $3,480 Current liabilities = $3,480 - 560 = $2,920 Total liabilities = $2,920 + 3,970 = $6,890

23. The Lakeside Inn had operating cash flow of $48,450. Depreciation was $6,700 and interest paid was $2,480. A net total of $2,620 was paid on long-term debt. The firm spent $24,000 on fixed assets and decreased net working capital by $1,330. What is the amount of the cash flow to stockholders? A. $5,100 B. $7,830 C. $18,020 D. $19,998 E. $20,680

E. 20,680 Cash flow from assets = $48,450 - (-$1,330) - 24,000 = $25,780 Cash flow to creditors = $2,480 - (-$2,620) = $5,100 Cash flow to stockholders = $25,780 - 5,100 = $20,680

32. A firm has a debt-equity ratio of .57. What is the total debt ratio? A. .36 B. .30 C. .44 D. 2.27 E. 2.75

A. .36 The debt-equity ratio is .57. Let the total equity be $100. Then, since total debt/total equity = 0.57, total debt must be $57 (0.57* 100). Then total assets are $157 (100 + 57). Total debt ratio = $57 / $157 = .36.

19. Kaylor Equipment Rental paid $75 in dividends and $511 in interest expense. The addition to retained earnings is $418 and net new equity is $500. The tax rate is 35 percent. Sales are $15,900 and depreciation is $680. What are the earnings before interest and taxes? A. $589.46 B. $1,269.46 C. $1,331.54 D. $9,560.85 E. $10,949.46

B. 1,269.46 Net income = $75 + 418 = $493 Taxable income = $493 / (1 - .35) = $758.46 Earnings before interest and taxes = $758.46 + 511 = $1,269.46

35. Taylor's Men's Wear has a debt-equity ratio of 56 percent, sales of $829,000, net income of $38,300, and total debt of $206,300. What is the return on equity? A. 3.32 percent B. 10.40 percent C. 5.74 percent D. 18.57 percent E. 14.16 percent

B. 10.40 Return on equity = $38,300 / ($206,300 / .56) = .1040, or 10.40 percent

10. Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date? A. Income statement. B. Creditor's statement. C. Balance sheet. D. Statement of cash flows. E. Dividend statement.

C. Balance sheet.

29. An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values. A. Increase in the cash ratio. B. Increase in the net working capital to total assets ratio. C. Decrease in the quick ratio. D. Decrease in the cash coverage ratio. E. Increase in the current ratio.

C. Decrease in the quick ratio.

31. Which one of the following accurately describes the three parts of the DuPont identity? A. Operating efficiency, equity multiplier, and profitability ratio. B. Financial leverage, operating efficiency, and profitability ratio. C. Equity multiplier, profit margin, and total asset turnover. D. Debt-equity ratio, capital intensity ratio, and profit margin. E. Return on assets, profit margin, and equity multiplier.

C. Equity multiplier, profit margin, and total asset turnover.

1. A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a: A. General partner. B. Sole proprietor. C. Limited partner. D. Corporate shareholder. E. Zero partner.

C. Limited Partner

21. Winston Industries had sales of $843,800 and costs of $609,900. The firm paid $38,200 in interest and $18,000 in dividends. It also increased retained earnings by $62,138 for the year. The depreciation was $76,400. What is the average tax rate? A. 32.83 percent B. 33.33 percent C. 38.17 percent D. 43.39 percent E. 48.87 percent

A. 32.83% Earnings before taxes = $843,800 - 609,900 - 76,400 - 38,200 = $119,300 Net income = $18,000 + 62,138 = $80,138 Taxes = $119,300 - 80,138 = $39,162 Tax rate = $39,162 / $119,300 = .3283, or 32.83 percent

34. TJ's has annual sales of $813,200, total debt of $176,000, total equity of $395,000, and a profit margin of 5.63 percent. What is the return on assets? A. 8.02 percent B. 6.48 percent C. 9.94 percent D. 7.78 percent E. 11.59 percent

A. 8.02 percent Return on assets = (.0563 × $813,200) / ($176,000 + 395,000) = .0802, or 8.02 percent

7. Which of the following apply to a partnership that consists solely of general partners? I. Double taxation of partnership profits. II. Limited partnership life. III. Active involvement in the firm by all the partners. IV. Unlimited personal liability for all partnership debts. A. II only. B. I and II only. C. II and III only. D. I, II, and IV only. E. II, III, and IV only.

E. II, III, and IV only.

11. The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate. A. Mean. B. Residual. C. Total. D. Average. E. Marginal.

E. Marginal.

6. Which one of the following best describes the primary advantage of being a limited partner instead of a general partner? A. Tax-free income. B. Active participation in the firm's activities. C. No potential financial loss. D. Greater control over the business affairs of the partnership. E. Maximum loss limited to the capital invested.

E. Maximum loss limited to the capital invested.

15. A firm has $680 in inventory, $2,140 in fixed assets, $210 in accounts receivables, $250 in accounts payable, and $80 in cash. What is the amount of the net working capital? A. $970 B. $720 C. $640 D. $3,110 E. $2,860

B. 720 Net working capital = $680 + 210 + 80 - 250 = $720

18. Jensen Enterprises paid $1,300 in dividends and $920 in interest this past year. Common stock increased by $1,200 and retained earnings decreased by $310. What is the net income for the year? A. -$210 B. $990 C. $1,610 D. $1,910 E. $2,190

B. 990 Net income = $1,300 + (-$310) = $990