FIN 300 Exam 1 HW Questions

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?

agency problem

Which one of the following is a capital budgeting decision?

deciding whether or not to purchase a new machine for the production line

A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a:

general partnership

Sara invested $500 six years ago at 5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $500 investment. Which type of interest is Sara earning?

simple interest

The formula which breaks down the return on equity into three component parts is referred to as which one of the following?

DuPont identity

Tracy invested $1,000 five years ago and earns 4 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?

compounding

Andre's Bakery has sales of $687,000 with costs of $492,000. Interest expense is $26,000 and depreciation is $42,000. The tax rate is 35 percent. What is the net income?

$82,550

Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal invests $5,000 at 7 percent when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts?

Sue will have more money than Neal as long as they retire at the same time.

Net working capital is defined as:

(current assets)-(current liabilities)

Which of the following individuals have unlimited liability based on their ownership interest? I. general partner II. sole proprietor III. stockholder IV. limited partner

I and II only

You want to have $1 million in your savings account when you retire. You plan on investing a single lump sum today to fund this goal. You are planning on investing in an account which will pay 7.5 percent annual interest. Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire? I. Invest in a different account paying a higher rate of interest. II. Invest in a different account paying a lower rate of interest. III. Retire later. IV. Retire sooner.

I and III only

Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes. I. compensation based on the value of the stock II. stock option plans III. threat of a company takeover IV. threat of a proxy fight

I, II, III, and IV

Which of the following are advantages of the corporate form of business ownership? I. limited liability for firm debt II. double taxation III. ability to raise capital IV. unlimited firm life

I, III, and IV only

Which of the following are current assets? I. patent II. inventory III. accounts payable IV. cash

II and IV only

Which one of the following statements related to liquidity is correct?

Liquid assets are valuable to a firm.

Which one of the following statements concerning net working capital is correct?

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

The _____ tax rate is equal to total taxes divided by total taxable income.

average

Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?

balance sheet

Which form of business structure is most associated with agency problems?

corporation

Your grandmother has promised to give you $5,000 when you graduate from college. She is expecting you to graduate two years from now. What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now?

decreases

For a tax-paying firm, an increase in _____ will cause the cash flow from assets to increase.

depreciation

Steve just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following?

discount rate

Cash flow from assets is also known as the firm's:

free cash flow

Which one of the following is a source of cash?

increase in accounts payable

Which one of the following actions by a financial manager is most apt to create an agency problem?

increasing current profits when doing so lowers the value of the firm's equity

A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a:

limited partner

The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate.

marginal

Which term relates to the cash flow which results from a firm's ongoing, normal business activities?

operating cash flow

Shelley won a lottery and will receive $1,000 a year for the next ten years. The value of her winnings today discounted at her discount rate is called which one of the following?

present value

Depreciation

reduces both taxes and net income

A common-size income statement is an accounting statement that expresses all of a firm's expenses as percentage of:

sales

Which one of the following parties has ultimate control of a corporation?

shareholders

On a common-size balance sheet all accounts are expressed as a percentage of:

total assets for the current year