Exam 1 (corporate finance)
Positive
A healthy networking capital is _____________
General partnership
A partnership in which all the partners share in gains or losses and all have unlimited liability for all debts (not just a particular share)
Life wealth
A sole proprietorship is limited to the proprietors ____________ span and personal____________
E
ANC Plastics has net working capital of $15,400, current assets of $39,200, equity of $46,600, and long-term debt of $22,100. What is the amount of the net fixed assets? A. $50,800 B. $56,900 C. $45,500 D. $48,100 E. $53,300
Personal finance
Budgeting, retirement planning, college planning, day-to-day cash flow issues
Quick ratio
(Current Assets - Inventory) / Current Liabilities - inventory is omitted because it is illiquid High = very liquid with little inventory Low = not very liquid and/or a lot of inventory
Net fixed assets
(Current liabilities + long term debt + equity) - current assets
Disadvantages of corporation
- Agency problem - double taxation (income taxed at corporate rate and dividends text at personal rate)
Advantages of Corporation
- Limited liability - unlimited life - separation of ownership and management - transfer of ownership is easy - easy to raise capital
Corporation
A business created as a distinct legal entity owned by one or more individuals or entities - acts as a person separate from its owners - can borrow money, own property, sue and be sued, and enter into contracts - easy transfer of ownership - double taxation (income taxed at corporate rate, dividends taxed at personal rate)
Partnership
A business formed by two or more individuals or entities. - more capital - UNLIMITED liability - dissolves when one partner dies or wishes to sell
Marginal tax rate
Amount of tax payable on the next dollar earned
Fixed assets
Assets that are relatively permanent, such as land, buildings, and equipment. Tangible - truck, building, equipment Intangible - patent, trademark
Marketing
Budgets, marketing research, marketing financial products
Inventory turnover
COGS/ avg inventory - how many times the entire inventory is sold off per year - high = efficiently managing inventory
C
Deep Sea Fisheries has current liabilities of $238,620, net working capital of $42,580, inventory of $262,750, and sales of $1,941,840. What is the quick ratio? A. .79 B. .34 C. .08 D. 2.94 E. 12.93
D
Donovan's would like to increase its internal rate of growth. Decreasing which one of the following will help the firm achieve its goal? A. Return on assets B. Net income C. Retention ratio D. Dividend payout ratio
Matching principle
Principle stating that expenses are compared to revenues for the same period.
Income statement
Revenues - expenses = net income (NI = "bottom line")
E
Wilberton's has total assets of $537,800, net fixed assets of $412,400, long-term debt of $323,900, and total debt of $388,700. If inventory is $173,900, what is the current ratio? A. 2.01 B. .52 C. .84 D. 1.18 E. 1.94
Incentives
____________ can be used to align management and stockholder interests
Current assets
cash and other assets expected to be exchanged for cash or consumed within a year - accounts receivable - inventory - prepaid expenses ...
Discounting
Figuring out the present value of money you will receive in the future. (opposite of compounding)
Balance sheet
Financial statement showing A firms accounting value on a particular date
Income statement
Financial statement summarizing a firms performance over a period of time
Common size Financial statements
Standardized financial statements that present all items in percentage terms - BS - all items as a percent of assets - IS - all items as a percent of sales
Principals
Stockholders that hire "agents" to run the company
Management
Strategic thinking, job performance, profitability
Average tax rate
Total taxes paid / total taxable income
A
Which one of the following terms is defined as the total tax paid divided by the total taxable income? A. Average tax rate B. Variable tax rate C. Marginal tax rate D. Absolute tax rate
D
Which one of these transactions will increase the liquidity of a firm? A. Cash purchase of new production equipment B. Payment of an account payable C. Cash purchase of inventory D. Credit sale of inventory at cost
Current ratio
current assets/current liabilities - creditors like to see it high - high = liquidity - too high = inefficient use of cash - should be at least 1
Capital structure
the mixture of debt and equity maintained by a firm - how to pay for assets - how to finance operations
Treasurer
Responsible for managing the firms - cash - credit - financial planning - capital expenditures
Net Working Capital
= Current assets - current liabilities Managing day-to-day finances
Agents
Managers that principles hired to run the company
B
Marcos is investing $5 today at 7 percent interest so he can have $35 later. This $35 is referred to as the: A. true value. B. future value. C. present value. D. discounted value. E. complex value.
A
Margie opened a used bookstore and is 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? A. Sole proprietorship B. Limited partnership C. Corporation D. Joint stock company
Sole proprietorship
A business owned by one person Least regulated form of organization - owner keeps all profits - UNLIMITED liability - all income taxes as personal (once)
Net working capital
A measure of a firms ability to manage and utilize assets. - short term liquidity
Balance sheet
Currently abilities Current Assets Long term debt Fixed assets Stockholder equity
Controller
Responsible for managing the firms - cost accounting - Financial accounting - tax payments - management information systems
Stakeholder
Someone other than a stockholder or creditor who potential he has a claim on the cash flows of the firm
Liquidity
Speed and ease of conversion to cash without significant loss of value - valuable in avoiding financial distress
Debt/equity ratio
Total debt / total equity - high = finance mostly with debt (borrowing) - low = finance mostly with equity (stock)
B
What is the future value of $5,700 invested for 18 years at 9 percent compounded annually? A. $26,397.74 B. $26,887.59 C. . $28,511.15 D. $27,513.06 E. $27,520.22
Current liabilities
liabilities due within a short time, usually within a year. Listed before LT debt - accounts payable
D
One advantage of the corporate form of organization is the: A. taxation of the corporate profits B. . unlimited liability for its shareholders. C. double taxation of profits. D. ability to raise larger sums of equity capital than other organizational forms.
Limited partnership
One or more general partners will run the business and have unlimited liability... But there are one or more "limited partners" who do not actively participate in the business - Limited partner debts are limited to the amount that partner contributes
LLC (Limited Liability Corporation)
Operates and is taxed like a partnership but retains limited liability for owners - hybrid of a partnership and a corporation
D
Net income increases when: A. fixed costs increase. B. depreciation increases. C. the average tax rate increases. D. revenue increases.
E
Net working capital decreases when: A. a new 3-year loan is obtained with the proceeds used to purchase inventory. B. a credit customer pays his or her bill in full. C. depreciation increases. D. a long-term debt is used to finance a fixed asset purchase. E. a dividend is paid to current shareholders.
D
Net working capital is defined as: A. the depreciated book value of a firm's fixed assets. B. the value of a firm's current assets. C. . available cash minus current liabilities. D. current assets minus current liabilities.
Long-term liabilities
liabilities owed for more than a year - 5 year loan - long term notes payable
Inversely
PV is _____________ related with time and interest rate
Sarbanes Oxley act
Act intended to strengthen protection against corporate accounting fraud and financial malpractice - driven by corporate scandals (Enron)
B
Donut Delite has total assets of $31,300, long-term debt of $8,600, net fixed assets of $19,300, and owners' equity of $21,100. What is the value of the net working capital? A. $9,800 B. $10,400 C. $18,900 D. $21,300
Accounting
Dual accounting and finance function, preparation of financial statements
E
How much money does Suzie need to have in her retirement savings account today if she wishes to withdraw $42,000 a year for 25 years? She expects to earn an average rate of return of 9.75 percent. A. $426,580.50 B. $407,419.81 C. $401,533.33 D. $385,160.98 E. $388,683.83
E
If a firm has an inventory turnover of 15, the firm: A. sells its entire inventory every 15 days. B. stocks its inventory only once every 15 days. C. delivers inventory to its customers every 15 days. D. sells its inventory by granting customers 15 days' of free credit. E. sells its entire inventory an average of 15 times each year.
B
Lucas expects to receive a sales bonus of $7,500 one year from now. The process of determining how much that bonus is worth today is called: A. aggregating. B. discounting C. simplifying D. compounding E. extrapolating
B
Matt and Alicia created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts? A. Limited partnership B. Corporation C. Sole proprietorship D. General partnership
Compounding
The process of accumulating interest in an investment over time to earn more interest (Future values)
D
The financial statement that summarizes a firm's accounting value as of a particular date is called the: A. income statement. B. cash flow statement. C. liquidity position. D. balance sheet.
Proxy fight
The mechanism by which unhappy stockholders can act to replace existing management
Agency problem
The possibility of conflict of interest between the owners and management of a firm.
D
The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict? A. Organizational B. Structural C. Formative D. Agency
Secondary markets
Where one owner or creditor sells shares to another
Primary markets
Where the corporation is the seller and the transaction raises money for the corporation - public offerings. (selling securities to public) - private placements. (specific buyer)
Capital budgeting
the process of planning and managing a firm's long-term investments
