Finance Exam 1

Which of the following statements is true concerning the price-earnings (PE) ratio?

A high PE ratio may indicate that a firm is expected to grown significantly.

Which one of the following will decrease the liquidity level of a firm?

Cash purchase of inventory

Which one of the following is an equity account?

Cash-in surplus

Which of the following transactions will increase the liquidity of a firm?

Credit sale of inventory at cost.

Net working capital is defined as:

Current assets minus current liabilities.

Which one of the following will increase the profit margin of a firm, all else constant?

Decrease in the tax rate

Working capital management includes which one of the following?

Determining which customers will be granted credit

Todd will be receiving a $10,000 bonus one year from now. The process of determining how much the bonus is worth today is called:

Discounting

Stadford, Inc. is financed with 40 percent debt and 60 percent equity. This mixture of debt and equity is referred to as the firm's:

capital structure

Tom earned $120 in interest on his savings account last year. Tom has decided to leave the $120 in his account so that he can earn interest on the $120 this year. This process of earning interest on prior interest earnings is called:

compounding

Martha is investing $5 today at 6 percent interest so she can have $10 later. The $10 is referred to as the:

future value

A sole proprietorship:

has its profits taxed as personal income.

Financial leverage:

increases the potential return to the shareholders

The Sarbanes-Oxley Act of 2002 has:

made officers of publicly traded firms personally responsible for the firm's financial statements.

Limited liability companies are primarily designed to:

provide limited liability whole avoiding double taxation.

Centre bank

will be greater if you invest with country bank

The Financial statements of Jame's Auto Repair reflect cash of $14,600, accounts receivable of $11,500, accounts payable of $22,900, inventory of $17,800, long-term debt of $42,000, and net fixed assets of $63,800. The firm estimates that if it wanted to cease operations today it could sell the inventory for $35,000 and the fixed assets for $49,000. The firm could also collect 100 percent of its receivables. What is the market value of the assets?

$110,000

Bait and Tackle has taxable income of $411,562. How much does it owe in taxes? (Use tax rate table)

$139,931

Your parents spent $6,200 to buy 500 shares of stock in a new company 13 years ago. The stock has appreciated 9 percent per year on average. What is the current value of those 500 shares?

$19,007.99

Jim just deposited $13,000 into his account at Traditions Bank. The bank will pay 1.3 percent interest, compounded annually, on this account. How much interest on interest will he earn over the next 15 years?

$244.20

Kroeger Exporters has total assets of $74,300, net working capital of $22,900, owner's equity of $38,600, and long-term debt of $23,900. What is the value of the current assets?

$34,700

Today, you deposit $2,400 in a bank account that pays 4 percent simple interest. How much interest will you earn over the next 5 years?

$480.00

Miser Materials paid $27,500 in dividends and $28,311 in interest over the oast year while net working capital increased from $13,506 to $18,219. The company purchased $42,000 in net new fixed assets and had depreciation expenses of $16,805. During the year, the firm issued $25,000 in net new equity and paid off $21,000 in long-term debt. What is the amount of cash flow from the assets?

$51,811

Ten years from now, you will be inheriting $100,000. What is this inheritance worth to you today if you can earn 5.5 percent interest, compounded annually?

$58,543.06

The Draiman Inc, book value of the current assets?

$74,900

What is the future value of $4,900 invested for 8 years at 7 percent compounded annually?

$8,419.11

The Pretzel Factory has net sales of $821,300 and costs of $698,500. The depreciation expense is $28,400 and the interest paid is $8,400. What is the amount of the firm's operating cash flow if the tax rate is 34 percent?

$93,560

Which of the following are advantages of the corporate form of organization?

-Ability to raise large sums of equity capital -Ease of ownership transfer -Limited liability for all owners

The Dupont Identity can be used to help a financial manager determine the:

-Degree of financial leverage used by a firm -Operating efficiency of a firm -Utilization rate of a firm's assets -Rate of return on a firm's assets

Which of the following will increase the future value of a lump sum investment?

-Increasing the interest rate -Increasing the time period

Wilsons Reality has total assets of $46,800, net fixed assets of $37,400, current liabilities of $6,100, and long-term liabilities of $24,600. What is the total debt ratio?

0.66

Eric & Jared's Department Store has current liabilities of $7,630, net working capital of $2,180, inventory of $2,750, and sales of $51,800. What is the quick ratio?

0.93

Peter's Motor Works has a total assets of $689,400, long-term debt of $299,500, total equity of $275,000, net fixed assets of $497,800 and sales of $721,500. The profit margin is 4.6 percent. What is the current ratio?

1.67

Isaac only has $690 today but needs $800 to buy a new laptop. How long will he have to wait to buy the laptop if he earns 5.4 percent compounded annually on his savings?

2.81 years

Baugh & Essary has net income of $149,200, sales of $936,800, a capital intensity ratio of 0.74, and an equity multiplier of 1.5. What was the return on equity?

32.25 percent

Textile Mills has sales of $923,000, cost of goods sold of $748,000, and accounts receivable of $106,700. How long on average does it take the firm's customers to pay for their purchases?

42.19

Sam wants to invest $5,000 for 5 years. Which one of the following rates will provide him with the largest future value?

7 percent interest, compounded annually.

Valentino's maintains a constant debt-equity ratio of 0.45. The firm had net income of $11,800 for the year and paid $6,500 in dividends. The firm has total assets of $92,000. What is the sustainable growth rate?

9.11 percent

The cash coverage ratio is used to evaluate the:

Ability of a firm to pay the interest on its debt.

The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?

Agency

Which one of the following applies to a general partnership?

Any one of the partners can be held solely liable for all of the partnership's debt.

Sara is investing $1,000 today. Which one of the following will increase the future value of that amount?

Increasing the interest rate.

Cash flow to creditors is defined as:

Interest paid minus net new borrowing

Which of the following is the maximum growth rate that a firm can achieve without any additional external financing?

Internal growth rate

Jeff deposits $3,000 into an account which pays 2.5 percent interest, compounded annually. At the same time, Kurt deposits $3,000 into an account paying 5 percent interest, compounded annually. At the end of three years:

Kurt will have a larger account value than Jeff will.

Which one of the following forms of business organizations offers liability protection to some of its owners but not all of its owners?

Limited partnership

Which of the following is an advantage of being a limited partner:

Losses limited to capital invested

Depreciation does which one of the following for a profitable firm?

Lowers taxes

Which one of the following will decrease the net working capital of a firm?

Making a payment on a long-term debt

Which of the following is the tax rate that applies to the next dollar of taxable income that a firm earns?

Marginal tax rate

The primary goal of financial management is to maximize which one of the following for a corporation?

Market value of existing stock

The sustainable growth rate is defined as the maximum rate at which a firm can grow given which of the following conditions ?

No new equity and a constant debt-equity ratio

Which 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

By definition, a bank that pays simple interest on a savings account will pay interest:

Only on the principal amount originally invested.

Valerie bought 200 shares of Able stock today. Able stock has been trading for some time on the NYSE. Valerie's purchase occurred in which market?

Seconday Market

Blooming gardens has an inventory turnover of 16. This means the firm:

Sells its inventory an average of 16 times each year

Capital budgeting includes the evaluation of which of the following?

Size, timing, and risk of future cash flows

Margie opened a used bookstore and its both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts?

Sole proprietorship

Which one of the following statements about a limited partnership is correct?

There must be at least one general partner.

Common-size financial statements present all the balance sheet account value as a percentage of:

Total assets