finance 301 exam 1
What was the solution to corporate governance issues in the 1980s? Corporate takeovers Government Bailouts SEC regulation Mutual Funds grew in size Accounting changes
corporate takeovers
According to the principles of finance, diversification does what to the risk of an investment portfolio?
decreases
Net Fixed Assets on the balance sheet are net of which of the following items? SG&A COGS Transaction costs Depreciation Operating expenses
depreciation
Which of the following is a major disadvantage of the corporate organizational form? Difficulty of raising capital Exposure to volatile stock markets Higher taxes Regulation Double taxation on the corporate and investor level
double taxation
Which is true about the income statement? SG&A expense and Cost of Goods Sold the same Depreciation is a cash expense Revenue = net income Revenues are matched to expenses Expenses are matched to revenues
expenses are matched to revenues
True or false: stockholders are NOT corporate stakeholders
false
According to frank Russell's model of investor emotion through market cycles, investor emotion in 2007 before the financial crisis would be best described as:
euphoria
True or False: According to GAAP, companies are supposed to capitalize costs that produce a future benefit and expense those that produce no such benefit.
true
True or False: Capital budgeting is when companies manage their investments in long-term assets:
true
True or False: Companies sometimes improperly shift expenses to later periods in order to boost earnings in the current period.
true
Making sales to a customer on credit is an example of a ________ decision, and would be the responsibility of the __________. Capital Budgeting; Treasurer Working Capital; Treasurer Capital Structure; Treasurer Working Capital; Controller Capital Structure; Controller
working capital; treasurer
Which of the following is also known as a "Fear Index" in the markets? Gold Price 30-year Treasury yield Price of oil DJIA NASDAQ
gold price
Which of the following is not a corporate stakeholder? Government Community Stockholders Customers Lenders
government
Which of the following companies was recently purchased by a Private Equity Group? AstraZeneca Heinz Men's Wearhouse Darden Restaurants Hertz
heinz
Why would a company capitalize its costs? To show a higher revenue in the current period To improve cash flow in the current period To invest in future growth To show higher profits in the current period To make cash available for dividends
higher profits in current period
Which of the following is a Current Asset category? Accounts Receivable Equity Property, Plant & Equipment Accounts Payable Retained Earnings
accounts receivable
Academic advancements over the past several decades, such as the CAPM and Black-Scholes model:
are widely used by markets
The Hostile Takeovers in the 1980's were made possible by: A Government Bailout Large management stakes in companies The Sarbanes-Oxley Act Institutional ownership of stocks Easy Financing with Junk Bonds
easy financing w junk bonds
Which of the following is NOT a balance sheet account associated with working capital? Equipment Short-term loan Cash Inventory Accounts payable
equipment
Out of the following, who believes the MOST in behavioral finance?
equity traders
The defense mechanism to protect against a hostile takeover where a company being targeted tries to make its stock less attractive to the buyer is called ____________. Crown Jewels The White Knight Poison Pills Pac-Man defense Golden Parachutes
poison pills
What piece of legislation was in result of the corporate governance crisis? Basel II None of the above Sarbanes Oxley TARP Dodd-Frank
sarbanes oxley
Which of the following best describes the solution to corporate governance issues in the 1990's? Department of Justice and SEC Regulations Management accountability for financial statements Shared governance with institutional investors Hostile Takeovers Government Bailouts
shared governance with institutional investors
Which of the following did NOT happen during the 2000s financial period? Bumpy recovery Crash and scandals Growth with debt Financial crisis Shrinking debt market
shrinking debt market
Which of the following organizational forms is easy to form but difficult to raise capital for? Sole Proprietorship Partnership None of the above Multinational corporation Corporation
sole proprietorship
Orren Hari was an advocate of what approach to managing a company? The shareholder value approach The efficiency approach The value approach The cash control approach The stakeholder approach
stakeholder approach
Given the following information, which stock has the highest return? Stock A: Current Price: $100 - Purchase Price: $85 - Dividends Paid: $3 Stock B: Current Price: $630 - Purchase Price: $545 - Dividends Paid: $20
stock A
Who is Danny Devito talking to in Other People's Money?
stockholders
Which stakeholder is paid in 'Cost of Goods Sold?' Government Stockholders Suppliers Lenders Employees
suppliers
What would Cost of Goods sold represent for Home Depot? The cost to pay the staff The cost to heat the stores The cost of merchandise The cost of insurance The cost to pay executives
the cost of merchandise
A healthcare company announces it has developed a new drug that will increase its annual revenue by 5-10% over the next three years. According to the efficient market hypothesis, the stock price will reflect this news
the day of the announcement
A company that records cash it receives from its lender bank and sales that are uncertain or lack economic value is recording bogus revenues.
true
A liquidity ratio of 2.0 suggests that a company has high short-term assets.
true
Inflation decreases your return on investment by reducing the future value of the money you receive on your investment
true
A form of earnings management designed to remove peaks and valleys from a normal earnings series, including steps to reduce and "store" profits during refers to Aggressive accounting Earnings management Income smoothing Fraudulent financial reporting Creative accounting practices
income smoothing
True or False: A corporation is considered a separate legal entity from its shareholders. Correct!
true
True or False: Deferred taxes are a result of different depreciation methods for GAAP and tax reporting.
true
True or False: Depreciation is a source of cash on the cash flow statement.
true
True or False: Generally Accepted Accounting Principles are a set of rules and standards that provide for consistency in financial reporting.
true
True or False: In the Anglo-American governance model, the Board of Directors is elected to represent shareholder interests.
true
True or False: Misstatements in the financial statements are typically a result of a company trying to meet Wall Street's expectation
true
True or False: Small-cap stocks are riskier than corporate bonds.
true
True or False: Two-thirds of misstatements of financial information are related to revenue recognition.
true
On a common size balance sheet, each item in the liabilities section is expressed as a percentage of what value? Liabilities + Stockholders Equity Power, Plant and Equipment (PP&E) Inventory Net Sales Cash
liabilities + SE
Which financial ratios are most important to suppliers? Valuation Profitability Liquidity Activity Leverage
liquidity
Which of the following companies recently used the pac-man defense mechanism? Men's Wearhouse Pershing Square Heinz Jos. A Bank Dell
men's warehouse
Which of the following is not a type of business organization? Partnership Corporation None of the above Monopoly Sole proprietorship
monopoly
Which two financial metrics does Warren Buffet use to analyze companies?
profit margin & ROE
Which of the following organizational forms has its profits taxed as income and is more difficult to form and transfer than a sole proprietorship? Sole Proprietorship Corporation Multinational corporation Partnership
partnership
According to the efficient market hypothesis, using technical analysis to forecast future stock prices is
useless
Which would you not expect to find in the notes to the financial statements? When Macy's recognizes revenues on gift card sales The number of gift cards sold Depreciation methods used to depreciate stores A breakdown of sales by department A note that Macy's sells receivables to Citigroup
# of gift cards
Given the following, calculate the company's current assets: current liabilities - $75 debt - $200 fixed assets - $500 Equity - $325 $100 $600 $75 $50 $200
$100
Given the following, how much in accounts receivable is on Company X's balance sheet?Sales - $400,000Accounts Receivable Turnover - 4.0xAccounts Payable - $75,000 $75,000 $100,000 $1,600,000 $1,000,000 $25,000
$100,000
Given the following information, what is Macy's market capitalization? Annual Sales $27.5B Annual Net Income $1.5B Earnings Per Share $3.93 Number of Shares 360 million Price Per Share $60
$21.6B
Given the following information calculate goodwill for the transaction: purchase price - $100,000 book value - $75,000 net income - $7,500. $25,000 $32,500 $92,500 $100,000 $7,500
$25,000
Angelo's Pizza Shop has the following balance sheet items. If these are the only accounts on its balance sheet, what is the value of current assets? Current Assets = ? | Current Liabilities = $30 | Common Equity = $50 | Fixed Assets = $100 | Long-Term Debt = 70 $50 -$150 -$100 $65
$50
What is the current price per barrel of WTI crude oil?
$52
Given the following information, what is the value of Gross Profit? Revenue = $100,000 | Cost of Goods Sold = $10,000 | Gross Profit = ? | Selling General & Administrative Expenses = $20,000 | Research and Development Expense = $5,000| Depreciation and Amortization Expense = ? | Operating Income = $62,000 |Income Tax Provision = $18,600| Net Income = ? $3,000 $90,000 $43,400 $62,000
$90,000
Given the following information, what is the Equity Multiplier using the strategic profit model? Net Income = $45,500 | Sales = $100,000 | Total Assets = 200,000 | Return on Equity = 36.4% 1.0 0.455 1.6 0.5 0.87
1.6
Historically, the average Return on Equity (ROE) of the S&P 500 is: 15% 50% 35% 20% 10%
15%
Given the following information, what is the Return on Assets? Sales = $100,000 | Cost of Goods Sold = $15,000 | Gross Profit = ? | Operating Expenses = $20,000 | Operating Income = ? | Income Tax Provision = $19,500 | Net Income = ? | Total Assets = $200,000 | Book Value of Equity = $125,000 15% 22.75% 36.40% 45.5%
22.75%
Angelo's Pizza Shop had total sales of $463,000 in its first year of operation. In the second year, sales increased to $625,000. What is the growth rate of Angelo's Pizza Shop's sales from the first year to the second year? (Round your answer to the nearest percent) 13% 23% -26% 35%
35%
Which of the following statements reflect a company's financials over a period of time? Statement of Cash Flows Balance Sheet Income Statement A and C
A and C
Pac-Man defense against a hostile takeover occurs when: A target company selling off its main assets upon a takeover bid A CEO taking his company private with a Private Equity partner A target company making a counter-takeover bid for the acquirer Top executives receiving compensation upon a change in control A Company diluting its shareholders event that 10% of their shares are purchased by a person/group
A target company making a counter-takeover bid for the acquirer
Forceful and intentional choice and application of accounting principles done in an effort to achieve desired results refers to which financial numbers game? Aggressive accounting Earnings management Income smoothing Fraudulent financial reporting None of the above
Aggressive accounting
What is the definition of goodwill? Amount paid for a company acquisition in excess of bookvalue Assets minus liabilities Present value of future customer satisfaction Cash flow generated from acquired companies Excess taxes paid to the IRS
Amount paid for a company acquisition in excess of book value
Which of the following duties do NOT fall under the CFO's role as Treasurer? -Financial Planning -Short-Term Capital Requirements -Audits -Capital Budgets -None of the above
Audits
According to the Principles of Finance, risk aversion means:
Investors takes small risks, but do not avoid risk at all cost
Which of the following is an example of asset allocation?
Choosing how much to invest in stocks vs. bonds
Which of the following is an example of an external control mechanism? Consumers decide to boycott McDonald's due to the bad quality of their food The Department of Justice banning a potential merger between Spring and T-Mobile Shareholders can vote in approval or disapproval of executive compensation and, given a majority, can change the Board of Directors if they are dissatisfied Carl Icahn attempting a hostile takeover for 89% control of U.S. Steel for $7 Billion after finally being rebuffed by CEO David Roderick The Federal Reserve imposing tougher standards on major banks after the financial crisis of 2008
Carl Icahn attempting a hostile takeover for 89% control of U.S. Steel for $7 Billion after finally being rebuffed by CEO David Roderick
Which of the following is true regarding The Rest of the World Model of Corporate Governance? Companies are managed according to the interests of the majority owner Government influence over companies never occurs A Board of Directors represents the shareholders Capital flows to companies with the best prospect of creating shareholder value Companies in business together own each other's stock
Companies are managed according to the interests of the majority owner
Based on the information listed below, which of the following is true regarding the three companies from the same industry? Company A: P/E=20; ROA=18% Company B: P/E=10; ROA=5% Company C: P/E=17; ROA=14% Investors believe that Company B has the best growth prospects. Company B is the most efficient when it comes to using assets to generate income. Company C is the least efficient when it comes to using assets to generate income. Investors believe that Company C has the best growth prospects. Company A is the most efficient when it comes to using assets to generate income.
Company A is the most efficient when it comes to using assets to generate income.
Which of the following equations represents successful shareholder value creation? Shareholders' Equity > Total Debt Cost of Capital > Return on Investment Return on Investment = Cost of Capital Cost of Capital < Return on Investment Current Assets > Current Liabilities
Cost of Capital < Return on Investment
Which of the following is not a liquidity ratio?
Debt-to-Equity Ratio
Which of the following is not true about financial statements? Accounts receivable are an asset Diluted EPS is on the balance sheet Gross profit = revenues - CGS EBIT = operating profit investing activities are typically a use of cash
Diluted EPS is on the balance sheet
Which of the following is true? Cash = retained earnings Gross Profit is another term for EBIT Capital Expenditures are a source of cash Dividends are a cash flow from financing activities Accounts receivable are on the income statement
Dividends are a cash flow from financing activities
Which of the following is true? Retained earnings are assets EBIT is operating profits The primary use of cash is operating activities The primary source of cash is financing activities Dividends are a cash flow from investing activities
EBIT is operating profits
Which company has not had an accounting scandal? AIG GM Enron Freddie Mac Lehman Brothers
GM
Which of the following numbers games would make a company's revenues look less volatile? Income Smoothing Fraudulent Activity Recording loans as revenue Aggressive interpretations of GAAP Capitalizing expenses
Income Smoothing
Companies attempt to create shareholder value by
Making decisions aimed at increasing the value of the firm
Which of the following is NOT a management tenet according to Gordon Gekko?
Management must grow the company
If a natural disaster hits a major oil producing region and inhibits global supply, what is most likely to happen?
Oil prices will reflect the lower supply immediately
According to GAAP, which is an acceptable revenue recognition practice? Recognizing revenue when the customer is billed Reporting one-time gains as revenue Recording loans as revenue Recognizing revenue prior to cash from the customer being received Recognizing revenue on a long term contract when the contract is signed
Recognizing revenue prior to cash from the customer being received
Which would boost income with one-time gains? Billing customers in advance Selling an undervalued asset Capitalizing R&D expenses Using operating leases to keep debt off the balance sheet Overstating the useful life of fixed assets
Selling an undervalued asset
All else equal, which of the following stocks should have the highest expected return? Stock A: Standard Deviation - 15% Stock B: Standard Deviation - 30% Stock C: Standard Deviation- 5%
Stock B
Corporate raiders showed that:
The best defense against a takeover is a high stock price
Which of the following contributed to failure of internal control mechanisms in the 1980s? Investors were allowed to talk to each other Managers saw themselves as investors There were too many small stockholders Managers had too many company stocks Outside investors had too much information
There were too many small stockholders
Which of the following is true about common size statements? Figures are presented in dollars Gross profit is presented as a % of assets Figures are presented as a % of net income Retained earnings are presented as a % of sales They are very useful to determine trends for industry comparisons
They are very useful to determine trends for industry comparisons
Which statement is most accurate about the dual challenges of management? They must balance providing high quality products and services while creating shareholder value None of the above They often must aggressively invest to grow revenue while limiting the amount of liabilities they take on in doing so They must balance out the compensation for themselves and the employees of the organization They need to make and execute plans for the long-term while posting consistent short-term results
They must balance providing high quality products and services while creating shareholder value
Which is necessary for a Ponzi scheme to continue? The ability to generate promised returns Changes in SEC regulations Investors withdrawing their funds Transparency of financial statements The ability to attract new investors
ability to attract new investors
The time value of money states that
a dollar today is worth more than a dollar tomorrow
Which of the following is NOT a reason a company aims to grow their market cap? -It allows them to pay off owed liabilities to debt-holders -They can compensate management with shares of the company -Companies can utilize their stock to make acquisitions -It increases shareholder value -Firms can utilize equity financing to make investments
allows them to pay off
Which of the following is true about net cash flow? an increase in current liabilities is a use of cash it is equal to net income plus depreciation depreciation is a use of cash an increase in inventory is a use of cash it is the same thing as profitability
an increase in inventory is a use of cash
Where do capitalized expenses go?
balance sheet
Where do retained earnings go in financial statements? Cash flow statement investing activities Income statement Cash flow statement operating activities Balance sheet Cash flow statement financing activities
balance sheet
Which of the following responsibilities fall under the CFO's role as the company's treasurer? Cost Accounting Manager Data Processing Manager Capital Expenditures Tax Manager Financial Accounting Manager
capital expenditures
Which of the following is an example of a Short-Term Asset? Cash An iPod Factory A patent A house 10-year loan
cash
Which of the following duties do NOT fall under the CFO's role as Controller? -Operating Budgets -Cash Management -None of the above -Financial Systems -Taxes
cash management
The __________ is considered one of the CFO's traditional responsibilities as financial engineer. Controller functions Financing & Capitalization Growth & Acquisitions Corporate Strategist Risk Management
controller functions
Which of the following is NOT one of the CFO's responsibilities as the company's treasurer? Cost Accounting Cash management Long-term financial planning Capital Budgeting Working capital management
cost accounting
Activist investors usually have a negative effect on a company's financial performance.
false
Grocery stores have low profit margins because it is a capital intensive business that creates high barriers to entry
false
The common size balance sheet is more useful than the common size income statement.
false
The random walk hypothesis is inconsistent with the efficient market hypothesis
false
True of False: Macy's net profit margin has declined since 2009.
false
True or False: A dollar today is worth less than a dollar tomorrow.
false
True or False: Beta and expected return are not related at all.
false
True or False: Cash flows from operations is a use of cash on the cash flow statement.
false
True or False: Fraud occurred mostly in the United States and is very uncommon internationally.
false
True or False: In order to achieve the highest level of return for the amount of risk we can take on, it is very important to not diversify our investments into different asset classes, and to only invest in small-cap bio-tech stocks.
false
True or False: Liquidity ratios measure a firm's ability to meet long-term debt obligations.
false
True or False: Market capitalization is equal to # of shares outstanding times Earnings per Share.
false
True or False: Starting in the 1970s, Bernie Madoff attracted investors by offering very high returns, which he was able to cover using funds from new investments.
false
True or False: Suppliers are most concerned with valuation ratios.
false
True or False: The CFO is typically involved in only accounting and short term management activities and is not involved in the long term strategy of the company.
false
True or False: The balance sheet lists assets at fair market value
false
True or false: In Gordan Gekko's "Greed is Good" speech, Gekko is arguing that management has made decisions that have been beneficial to shareholder value
false
rue or False: Stakeholders and Stockholders mean the same thing.
false
The ultimate financial shenanigan is? Aggressively recognizing revenues Failing to disclose liabilities Shifting expenses to later periods Fraud Recognizing one-time gains as revenue
fraud
Which of the following is not one of the three basic financial statements? Cash Flows Balance Sheet Income Statement General Ledger
general ledger
Incorrectly deferring expenses to next year has which of the following effect? Increase Revenues Increase Profits Reduces assets Increases cash flow Decreases cash flow
increase profits
Why do firms choose to raise capital with debt? Interest payments can be paid more slowly Debt can be raised more quickly Interest payments are tax deductible Debt holders are only owed residual benefits Debt is less risky
interest payments are tax deductible
What investment vehicle did Charles Ponzi use in the original Ponzi scheme? International Reply Coupons Junk Bonds Stocks and Options Tulips Mortgage Backed Securities
international reply coupons
Which of the following is not a fixed asset? Goodwill Property Plant Inventory Equipment
inventory
The model of governance in which there are usually very few takeovers and oversight is provided by large equity holders is Fluid Capital Model Minority Owner Model Anglo-American Model Rest of World Majority Owner Model Japan-Germany Dedicated Capital Model
japan/germany
What is NOT true about corporate governance? Many corporate governance battles result in hostile takeovers and proxy battles Corporate governance battles often result from companies not being managed in the interest of the owners Management teams are rarely shareholders in their own companies It is the system of rules, practices, and processes by which a company is directed and controlled
management teams are rarely shareholders in their own companies
Believers of behavioral finance principles do believe that
markets are not always efficient
The corporate governance contest Other People's Money is a Poison pill Proxy fight Merger Golden Parachute Hostile takeover
proxy fight
Which of the following was an issue with internal control in the 1980's? Proxy rules favored companies There were a lot of large shareholders exerting influence on companies Proxy voting was confidential Management owned a significant % of stock There was a lot of CEO turnover
proxy rules favored companies
Why is the price of oil important? It reflects fear in the market It is considered a value store It reflects economic demand It is considered a measure of inflation It is correlated with stock prices
reflects economic demand
Which of the following is NOT a characteristic of a corporation They can raise capital with relative ease They are easily formed They are double taxed Ownership is easily transferable They carry limited liability
they are easily formed
What is one of the ways in which institutional investors became more involved in corporate governance issues? They gained more voting and governance rights as shareholders They refused to invest in the company None of the above They alerted regulators They threatened to press charges against management
they gained more voting..
If the theory of efficient capital markets is correct, which of the following statements is true? -It is useless to attempt to beat the market - Only Wall Street's top bucket analysts are able to beat the market -All of the Above -Analysts who have beaten market returns in the past are more likely to beat the market in the future
useless to attempt
If biotechnology stocks and utility stocks both provide the same expected return, then which would you invest in? (Hint: biotechnology companies are much riskier than utility companies because most of the time the entire company revolves around a single drug that has not yet been approved)
utility stocks