Finance exam 1

RJ's has a fixed asset turnover rate of 1.26 and a total asset turnover rate of .97. Sam's has a fixed asset turnover rate of 1.31 and a total asset turnover rate of .94. Both companies have similar operations. Based on this information, RJ's must be doing which one of the following?

Utilizing its total assets more efficiently than Sam's

The cash flow related to interest payments less any net new borrowing is called the:

cash flow to creditors.

Your grandmother has promised to give you $10,000 when you graduate from college. If you speed up your graduation by one year and graduate two years from now rather than the expected three years, the present value of this gift will:

increase.

Which one of the following is an agency cost?

Hiring outside accountants to audit the company's financial statements

Which one of the following questions is a working capital management decision?

How much inventory should be on hand for immediate sale?

Which one of the following statements related to annuities and perpetuities is correct?

A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.

Which one of the following accounts is the most liquid?

Accounts Receivable

Which one of the following terms is defined as a mixture of a firm's debt and equity financing

Capital Structure

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 company's equity

Which one of the following is an expense for accounting purposes but is not an operating cash flow for financial purposes?

Interest Expense

Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Alfredo will be involved as an active consultant and manager and will also contribute funds. Sam and Alfredo are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum. Which form of business entity should these individuals adopt?

Limited Partnership

Nan and Neal are twins. Nan invests $5,000 at 7 percent at age 25. Neal invests $5,000 at 7 percent at age 30. Both investments compound interest annually. Both twins retire at age 60 and neither adds nor withdraws funds prior to retirement. Which statement is correct?

Nan will have more money than Neal at any age.

You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.)

Option B has a higher present value at Time 0.

Which one of the following is a primary market transaction?

Sale of a new share of stock to an individual investor

Renee invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?

Simple interest

A positive cash flow to stockholders indicates which one of the following with certainty?

The dividends paid exceeded the net new equity raised.

The decision to issue additional shares of stock is an example of:

a capital structure decision

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

average

A business created as a distinct legal entity and treated as a legal "person" is called a(n):

corporation

Cash flow to stockholders is defined as:

dividend payments less net new equity raised.

Noncash items refer to:

expenses that do not directly affect cash flows.

If a company produces a return on assets of 14 percent and also a return on equity of 14 percent, then the firm:

has an equity multiplier of 1.0.

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

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.

profitability

Ratios that measure a firm's liquidity are known as _____ ratios.

short-term solvency

Corporate Dividends are:

taxable income of the recipient even though that income was previously taxed.