Intro to Finance Sample Questions
True or false: Sole propriertoships are taxed twice.
False
Virtually all businesses in the United States are large corporations
False
Corporation
- a firm with a legal identity separate from the people who own its stock - A business owned by stockholders - Not personally responsibly for their debts
Book Value Equation
BV = Initial Cost - Accumulated Depeciation
Net Cash Flow
Cash inflows - cash outflows Net Income+Depreciation
Book value per share
Common Equity/ Common Shares outstanding
Difference between common stock and preferred stock include the facts that....
Common stockholders receive dividends only after preferred stockholders receive theirs, and common stockholders have voting privileges
Book value
Cost - Accumulated Depreciation Total Owners Equity/Shares of stock
A disadvantage of the corporate form of organization is that corporate profits are taxed twice, once as corporate profits and again as the personal income of dividend recipients, whereas profits for proprietorships are only taxed once
True
Common stock is defined as stock that allows its holder a vote in corporate decisions proportional to the stockholder's share of the outstanding common stock
True
In a partnership, the partners and the firm are legally inseparable
True
The primary difference between a sole proprietorship and a partnership is that the partnership has more than one owner
True
True or false: Credit is an arrangement to receive cash, goods, or services now and pay for them in the future.
True
ROE equation
Net Income/Owner's Equity ROE=Profit Margin x Asset Turnover x Leverage
Both ____ and _____ are subject to unlimited liability.
Sole proprietorships; partnerships
Which tax may or may not be withheld from your paycheck depending on where you live?
State
Sales taxes
Taxes that are used by some states as a source of their income and each state sets its own rate
Federal income taxes
Taxes that are used to support government programs
A corporate takeover can occur when an individual or group is able to buy and control more than 50 percent of a corp, outstanding common stock, thus controlling corporate decision making
True
Preferred stockholders receive their dividends ________(before or after?) common stockholders and are ___________ in corporate decisions
before; nonvoters
Corporate bond
bonds sold by corporations to finance business activities, which usually pay a fixed rate of interest and are paid off after a specific term - Or in other words, a corporate IOU
Salvage value
the estimated value of a fixed asset at the end of its useful life Gains(losses)= salvage value
Leverage Ratio
the ratio of assets to bank capital total debt/total equity total assets / total stockholder's equity
Unlimited liability for sole propietorship means that
they can lose everything they own if their businesses fail
One advantage of a partnership is the ability to acquire greater access to capital resources by taking on new partners
true
One difference between a bondholder and a stockholder in a corp. is that bondholders are lenders to the corp. while stockholders are actual owners of the corp.
true
The law treats a corporate as a separate legal entity
true
True or false: a trust is not a corporation
true
The order in which dividends are paid to different types of stockholders...
convertible -> preferred -> common
The limited liability associated with the corporate form of ownership results from a....
corporate existing as legal entities, separate and apart from their owners
The form of business organization that has the largest sales volume is the...
corporation
The most effective form of business organization for raising capital is the:
corporation
Depreciation Equation
cost of asset-depreciation/remaining life of asset = (cost - salvage value) / useful life
Variable Costs
expenses that change with the number of items produced
Preferred stockholders are paid dividends before common stockholders
false
Preferred stockholders, in addition to being allowed to vote on corporate decisions, are paid dividends before common stockholders
false
Profits equation
product equals total revenue minus total cost or, total revenue - expenses
The simplest form of business ownership is a....
proprietorship
Some 72 percent of businesses in the United States are....
proprietorships
Based on the following information, what amount would be SUBTRACTED from the BANK BALANCE side of a checking account reconciliation? Service charge $12, Outstanding checks $145, Interest $3.50, Deposit in transit $80
$145
Turnover Ratio
% of a fund's holdings that have changed or been replaced during a 12 month period Sales / Operating Assets S/OA
Multinational Corporation
- A corporation with production facilities overseas - An organization that manufactures and markets products in many different countries and has multinational stock ownership and multinational management - Large Scale Companies that initially began as business in a certain region of the world but has grown to become so big and is now an "international" company. Examples: General Electric (GE), Nike, Nokia, and McDonalds.
pass-through entity
- Any entity that does not have its income taxed at the level of that entity; examples are partnerships, S corporations, and limited liability companies. - Business entity that does not pay corporate taxes, such as a partnership. Rather, any profits are taxed at individual rates when distributed to the partners
Which of the following would result in Company B adding more to its cash at the end of the year than Company A, assuming all else is the same for them.
- B may depreciate its equipment faster than A - B has a smaller proportion of customer sales that become accounts receivable than A - B pays less dividends than A
Which of the following is an advantage of a sole proprietorship?
- Ease of starting a business - Being your own boss - Pride of ownership
Variable costs examples
- Ink, Hourly Wage, Laundry costs, raw materials - energy supply, transport expenses, labor costs, and other needs when choosing an industrial location
Which of the following events will cause a business's ROE to be lower than the year before, all else the same?
- It's bank charges a higher interest rate - Company retained earnings from the year before - Price it receives for its product is lower - Employees are paid more per hour
Balance Sheet
- Leverage ratio (see above) = ratio of assets to equity (book value), often described as a "multiple" - Debt-to-equity ratio = ratio of (usually long-term) debt to equity (book value) - Liquidity ratio = ratio of cash + money market investments + other short term assets to short term liabilities (a variety of definitions exist)
Which of the following present limited liability to owners/shareholders?
- Limited partnership - S corporation - C corporation
Unlimited liability
- Personal responsibility of the owners for all of the firm's debts - a disadvantage of some types of businesses that may require the owner or owners to forfeit personal assets in order to pay the debts of the business - When the debts of a sole proprietorship or partnership are greater than its resources, the owners of the business are personally responsible for all debts of the business. Personal assets may be sold to pay for the debts of the business. Jami lost her debit card. She did not report it missing for 3 months. If an unauthorized person used her debit card, her maximum liability is:
Income Statement
- Profit margin = ratio of profits to revenue - Operational leverage = ratio of fixed costs to total costs - Payout ratio = percentage of net profits paid as dividends - Retention ratio = 1 minus payout ratio - Coverage ratio = ratio of earnings before deducting interest and taxes (and depreciation & amortization, or EBITDA) to interest - Effective tax rate = profits taxes as percent of net profits before taxes
Mixed
- Return-on-equity (ROE) = net profits divided by equity (book value) - Turnover ratios = ratio of revenue to assets (known as an "activity" ratio; financial assets may be excluded from denominator) - Debt-to-earnings = ratio of debt to EBITDA (gives the number of years it would take to pay off debt
Which of the following is a "pass-thru" entity?
- Sole proprietorship - partnership - limited partnership - S corporation
Corporate Governance
- The ability of stockholders to exercise the power and control of the corporation - Stockholders elect the members of a board of directors who oversee the operations of the corporation. Real power held by management group not stockholders who cooperate with a few major stockholders to ensure they remain in power.
The main disadvantage of a general partnership is:
- The unlimited liability of the partners
Sole proprietorship
- a firm owned by one person - Suffer from limited sources of capital, high risk. - Do not have to pay income taxes on profits, only personal income.
Partnership
- a firm owned by two or more people with unlimited liability
Dividend
- a part of a corporation's net income paid to stockholders - To calculate dividends for a given year, first take the retained earnings figures at the beginning and end of the year and subtract the beginning-of-year number from the end-of-year number. That will tell you the net change in retained earnings for the year. Next, take that net change figure and subtract it from the net earnings for the year.
Which of the following actions by a company will cause its leverage ratio to increase?
- borrow money and use it to purchase another company that is unleveraged - borrow money and use it to purchase stock in another company that is unleverage - use cash on its balance sheet and send it to shareholders as a special dividend - borrow money and send it to shareholders as a special dividend
Which of the following company actions require registration with the S.E.C.?
- borrowing money by selling bonds in the open market - an initial public offering - a follow-on offering of shares in the open market
Which of the following will increase a company's book value but not necessarily its market value?
- it makes a profit but pays out no dividends - the price of its shares declines and it issues new shares
Which of the following is probably the most important reason for incorporating?
- limited liability of shareholders.
Why do you plan for retirement instead of relying on social security to take care of you?
- monthly social security benefits are not going to be good enough to live on comfortably - you aren't depending on someone else to take care of you - the system may not be able to pay promised benefits in the future
Stocks
- shares of a corporation that are claims on the firm's assets
Which of the following business structures may use leverage (i.e. borrow money)?
- sole proprietorship - partnership - limited partnership - S corporation - C corporation - Trust
Leverage ratio
- total debt/total equity Companies rely on a mixture of owners' equity and debt to finance their operations. One of multiple financial measurements that determine how much capital comes in the form of debt (loans), or assess the ability of a company to meet financial obligations
Profit Margin Ratio
A measure of the net income generated by each dollar of sales; computed as net income divided by net sales NI/NS
Stockholder
A person who owns stock in a corporation. Also called a shareholder.
ROE
= profit margin x turnover ratio x leverage ratio All else the same, an increase in any of the ratio values increases ROE. But the key is "all else the same." An increase in sales may raise the turnover ratio. But the sales increase may be accompanied by a decrease in profit margin. Leverage acts as a multiple - it "multiplies" the other two ratios to produce the ROE. Therefore, from the financial manager's perspective, an increase in leverage raises ROE. But it increases the firm's interest expense, hurting the profit margin. (And it increases the risk of bankruptcy.)
Depreciation
A lessening in value
Common stock allows the holder to do all of the following except...
Avoid double taxation
Business in the US exhibit different forms of business organization because....
Each form has unique advantages that satisfy particular forms
Total Cost
Fixed Cost + Variable Cost
What is the difference between gross pay and net pay?
Gross pay is before taxes, net pay is after taxes
Deductions
Items that are subtracted from your gross income.
A ____________________ is a business with two or more owners.
Partnership
Many people own stock indirectly through __________ and ____________.
Pension plans; life insurance policies
Total revenue
Price x Quantity - Or, the number of units sold multiplied by the average price per unit
If $100 is invested, then the "Return on Investment" (ROI) is:
Profit for the Year / 100
Fixed costs examples
Property tax, insurance, vehicle registration Heating and Lighting, Rent, Marketing Costs (increase in production will not cause an increase on marketing costs), Salaries =Salary, insurance, taxes, rent, tuition
Net profits after taxes
ROE
Coverage ratio
Ratio that compares a business's earnings before interest and taxes (EBIT) to the cost of debt. Operating Profit/Interest Expenses (Net income + Interest + Taxes) / (Interest Expense + Capitalized Interest)
Property taxes
The main source of revenue for local governments
A sole proprietorship is a business where all of the following are true, except...
The proprietorship can sell stock to increase its capital resources
Fixed Cost
a cost that does not change, no matter how much of a good is produced An activity cost (as of investment in land, plant, and equipment) that must be met without regard to level of output; an input cost that is spatially constant
Profits
are what is left after operating costs, taxes, and paybacks to investors.
Corporate bonds might be preferred to stocks by someone who wants to hold less risky assets because....
in the event of poor corporate performance, bondholders are paid before stockholders
The primary difference between multinational corp. and an international corp. is that....
international corp. sell in overseas markets whereas multinationals both sell and produce overseas
One advantage for a corp. is ______________ while a disadvantage is the _________ of dividends
limited liability; double taxations
In a partnership, the owners....
may have access to more venture capital, but each loses some independence in decision making.
A partner who is not actually involved in the partnership but lends his name for public relations purposes is a:
nominal partner
Most stockholders are people who have....
only a small investment of a few thousands dollars in the stock market
