Business Finance Chapters 1-3 Practice

Sole Proprietorship

business owned by a single individual. Sole proprietorship firms are more common than any other type of business.

C. Net working capital increases when inventory is sold for cash at a profit.

8. Which one of the following statements concerning net working capital is correct? A. The lower the value of net working capital the greater the ability of a firm to meet its current obligations. B. An increase in net working capital must also increase current assets. C. Net working capital increases when inventory is sold for cash at a profit. D. Firms with equal amounts of net working capital are also equally liquid. E. Net working capital is a part of the operating cash flow.

C. general partnership.

A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a: A. corporation. B. sole proprietorship. C. general partnership. D. limited partnership. E. limited liability company.

A. 1.87 Earnings per share = $126,400/160,000 = $0.79 Price per share = $0.79 × 18.7 = $14.773 Market-to-book ratio = $14.773/$7.92 = 1.87

A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of $126,400, a price-earnings ratio of 18.7, and a book value per share of $7.92. What is the market-to-book ratio? A. 1.87 B. 1.84 C. 2.23 D. 2.45 E. 2.57

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.)

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

B. $30,300 Current liabilities = .60 × $126,000 = $75,600 Total assets = $141,800 + $126,000 = $267,800 Current assets = $267,800 - $161,900 = $105,900 Net working capital = $105,900 - $75,600 = $30,300

Bonner Collision has shareholders' equity of $141,800. The firm owes a total of $126,000 of which 60 percent is payable within the next year. The firm net fixed assets of $161,900. What is the amount of the net working capital? A. $25,300 B. $30,300 C. $75,600 D. $86,300 E. $111,500

C: Debt and equity

Capital structure is the mixture of (___) maintained by a firm. A: short-term debt and long-term debt B: Cash and credit C: Debt and equity D: Capital and investment

Tax Rate * Taxable Income

How to calculate tax?

Earnings before interest and tax- interest expense

How to calculate taxable income

E. has an equity multiplier of 1.0

If a firm produces a twelve percent return on assets and also a twelve percent return on equity, then the firm: A. may have short-term, but not long-term debt. B. is using its assets as efficiently as possible. C. has no net working capital. D. has a debt-equity ratio of 1.0. E. has an equity multiplier of 1.0

C. was facilitated in the secondary market.

Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction: A. took place in the primary market. B. occurred in a dealer market. C. was facilitated in the secondary market. D. involved a proxy. E. was a private placement

E. decrease in common stock

Which one of the following is a use of cash? A. increase in notes payable B. decrease in inventory C. increase in long-term debt D. decrease in accounts receivables E. decrease in common stock

A. 32.83 percent 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 = 32.83 percent

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

E. 32.14 percent Return on equity = (.0968 × $807,200)/[$1,105,100 × (1 - .78)] = 32.14 percent

Reliable Cars has sales of $807,200, total assets of $1,105,100, and a profit margin of 9.68 percent. The firm has a total debt ratio of 78 percent. What is the return on equity? A. 13.09 percent B. 16.67 percent C. 17.68 percent D. 28.56 percent E. 32.14 percent

C. $5,404 Earnings before interest and taxes = $12,900 - $5,800 - $1,100 = $6,000 Taxable income = $6,000 - $700 = $5,300 Tax = .32($5,300) = $1,696 Operating cash flow = $6,000 + $1,100 - $1,696 = $5,404

Webster World has sales of $12,900, costs of $5,800, depreciation expense of $1,100, and interest expense of $700. What is the operating cash flow if the tax rate is 32 percent? A. $4,704 B. $5,749 C. $5,404 D. $7,036 E. $7,100

Earnings before interest and tax Taxable Income Tax Operating Cash flow+ EBIT-depreciation-Tax

What do you need to find to get operating cash flow?

Cash+Accounts Receivable+Inv.-Current Liabilities

What is the change in networking capital?

D. corporation

Which form of business structure is most associated with agency problems? A. sole proprietorship B. general partnership C. limited partnership D. corporation E. limited liability company

D. I, II, and IV only

Which of the following accounts are included in working capital management? I. accounts payable II. accounts receivable III. fixed assets IV. inventory A. I and II only B. I and III only C. II and IV only D. I, II, and IV only E. II, III, and IV only

B. II and IV only

Which of the following are current assets? I. patent II. inventory III. accounts payable IV. cash A. I and III only B. II and IV only C. I, II, and IV only D. I, II and IV only E. II, III, and IV only

B: Financial manager

Which one not belongs to "three types of financial management decisions"? A: Capital structure B: Financial manager C: Capital budgeting D: Working capital management

C. The owner of a sole proprietorship is personally responsible for all of the company's debts.

Which one of the following statements concerning a sole proprietorship is correct? A. A sole proprietorship is designed to protect the personal assets of the owner. B. The profits of a sole proprietorship are subject to double taxation. C. The owner of a sole proprietorship is personally responsible for all of the company's debts. D. There are very few sole proprietorship's remaining in the U.S. today. E. A sole proprietorship is structured the same as a limited liability company

B. Liquid assets are valuable to a firm.

Which one of the following statements related to liquidity is correct? A. Liquid assets tend to earn a high rate of return. B. Liquid assets are valuable to a firm. C. Liquid assets are defined as assets that can be sold quickly regardless of the price obtained. D. Inventory is more liquid than accounts receivable because inventory is tangible. E. Any asset that can be sold within the next year is considered liquid.

C. $7,000 Net income = $469 + $4,221 = $4,690 Earnings before taxes = $4,690/(1 - .30) = $6,700 Earnings before interest and taxes = $6,700 + $1,300 = $8,000 Depreciation = $30,000 - $15,000 - $8,000 = $7,000

Suppose you are given the following information for Bayside Bakery: sales = $30,000; costs = $15,000; addition to retained earnings = $4,221; dividends paid = $469; interest expense = $1,300; tax rate = 30 percent. What is the amount of the depreciation expense? A. $4,820 B. $5,500 C. $7,000 D. $8,180 E. $9,500

D. capital budgeting

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