FIN ch 1-5

In auction markets like the NYSE, Brokers and agents meet at a physical location to buy and sell their assets. Markets like Nasdaq represent Dealers operating in dispersed locales who buy and sell assets themselves, usually communicating with other dealers electronically or literally over the counter.

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In the corporate form of ownership, the shareholders are the owners of the firm. The shareholders elect the Board of directors of the corporations, who in turn appoint the firm's management. This separation of ownership from control in the corporate form of organization is what causes agency problems to exist. Management may act in its own or someone else's best interests, rather than those of the shareholders. If such events occur, they may contradict the goal of maximizing the share price of the equity of the firm.

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Jamie is employed as a commercial loan officer for a regional bank centered in the Midwestern section of the U.S. Her job falls into which one of the following areas of finance?

Financial institutions

Which one of the following best describes the primary intent of the Sarbanes-Oxley Act of 2002?

Increase protection against corporate fraud

Financial statement analysis:

provides useful information that can serve as a basis for forecasting future performance.

Given an interest rate of zero percent, the future value of a lump sum invested today will always:

remain constant, regardless of the investment time period.

Which of the following are advantages of the corporate form of organization? 1. Ability to raise large sums of equity capital 2. Ease of ownership transfer 3. Profits taxed at the corporate level 4. Limited liability for all owners

1, 2, 4

Martha's Sweet Shop reduced its fixed assets this year without affecting the shop's operations, sales, or equity. This reduction will increase which of the following ratios? I. Capital intensity ratio II. Return on assets III. Total asset turnover IV. Return on equity

2 & 3

Which of the following will increase the sustainable rate of growth for a firm? I. Decreasing the profit margin II. Increasing the dividend payout ratio III. Decreasing the capital intensity ratio IV. Increasing the target debt-equity ratio

3 & 4

Which one of the following has the highest effective annual rate?

6 percent compounded monthly

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

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

Which one of the following statements is true concerning annuities?

All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

Which one of the following statements is correct?

All stock trades between existing shareholders are secondary market transactions

Bill just financed a used car through his credit union. His loan requires payments of $275 a month for 5 years. Assuming that all payments are paid timely, his last payment will pay off the loan in full. What type of loan does Bill have?

Amortized

Which one of the following statements concerning annuities is correct?

An annuity due has payments that occur at the beginning of each time period.

Which one of the following statements concerning the balance sheet is correct?

Assets are listed in descending order of liquidity.

Which one of the following terms is defined as the total tax paid divided by the total taxable income?

Average tax rate

Deciding whether to expand a manufacturing plant is an example of what?

Capital budgeting

Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0.

Cash payment of an account payable

Which one of the following is most apt to align management's priorities with shareholders' interests?

Compensating managers with shares of stock that must be held for 3 years before the shares can be sold

What goal should always motivate the actions of the firm's financial manager?

Current market value(share price) of the equity

Which one of the following will decrease the present value of an annuity?

Decrease in the annuity payment

Which one of the following best indicates a firm is utilizing its assets more efficiently than it has in the past?

Decrease in the capital intensity ratio

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

Decrease in the tax rate

Which one of the following is a working capital decision?

How much cash should the firm keep in reserve?

Which one of the following relates to a negative change in net working capital?

Increase in current liabilities with no change in current assets for the period

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

Increasing the interest rate

Which one of the following best matches the primary goal of financial management?

Increasing the market value of firm

You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal at the end of 3 years. What type of loan did you obtain?

Interest-only

Which one of the following is an advantage of being a limited partner?

Losses limited to capital invested

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

Marginal tax rate

Deciding whether to issue new equity and use the proceeds to retire outstanding debt is an example of what?

capital structure

Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period?

Positive cash flow from assets

New Century Products is a company that was founded last year. While the outlook for the company is positive, it currently has negative earnings. If you wanted to measure the progress of this firm, which one of the following ratios would probably be best to monitor given the firm's current situation?

Price-sales ratio

Cindy is taking out a loan today. The cash amount that she will receive today is equal to the present value of the lump sum payment which she will be required to pay 2 years from today. Which type of loan is this?

Pure discount

Which one of the following will increase cash flow from assets but not affect the operating cash flow?

Sale of a fixed asset

Which one of the following statements is correct?

Shareholders' equity is the residual value of a firm.

Terry invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested?

Terry could have the same future value and invest less than $2,000 initially if he could earn more than 6.5 percent interest.

Today, Courtney wants to invest less than $5,000 with the goal of receiving $5,000 back some time in the future. Which one of the following statements is correct?

The period of time she has to wait decreases as the amount she invests today increases.

Which one of the following is an example of a perpetuity?

Trust income of $1,200 a year forever

advantages and which are disadvantages of the corporate form of organization?

advantages: limited liability, ability to raise capital, ease of transferability, unlimited life Disadvantage: The double taxation to shareholders of distributed earnings and dividends

The Du Pont identity can be used to help a financial manager determine the: I. degree of financial leverage used by a firm. II. operating efficiency of a firm. III. utilization rate of a firm's assets. IV. rate of return on a firm's assets.

all

Which of the following are potential ways to align management goals with shareholder interests? 1. Employee stock options 2. Threat of a takeover 3. Management bonuses tied to performance goals 4. Threat of a proxy fight

all

Firms that compile financial statements according to GAAP:

can still manipulate their earnings to some degree.

The present value of a lump sum future amount:

increases as the interest rate decreases.

If a firm has a negative cash flow from assets every year for several years, the firm:

may be continually increasing in size.

You've probably noticed coverage in the financial press of an initial public offering (IPO) of a company's securities. Web search company Google is a relatively recent example. IPO is a...?

primary market transaction

Limited liability companies are primarily designed to:

provide limited liability while avoiding double taxation.

A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:

will be greater than 12.9 percent.

Modifying the firm's credit collection policy with its customers is an example of what?

working capital management