Finance Exam #1

Why use the quick ratio vs. the current ratio?

-uses most liquid assets -allows comparison with firms with different inventory practices

b) is a legal entity separate from its owners.

A corporation: a) is ultimately controlled by its board of directors. b) is a legal entity separate from its owners. c) is prohibited from entering into contractual agreements. d) has its identity defined by its bylaws. e) has its existence regulated by the rules set forth in its charter.

c) frequently use accounting information.

When conducting a financial analysis of a firm, financial analysts: a) cannot use accounting information as it is historical. b) rely solely on accounting information. c) frequently use accounting information. d) ignore accounting information but do use marketing information. e) assume the future will be a repeat of the past as reflected in the firm's accounting reports.

c) sale of 1,000 shares of newly issued stock by Alt Company to Miquel.

One example of a primary market transaction would be the: a) sale of 100 shares of stock by Maria to her best friend. b) purchase by Theo of 5,000 shares of stock from his father. c) sale of 1,000 shares of newly issued stock by Alt Company to Miquel. d) sale by Terry of 50,000 shares of stock to his brother. e) sale of 5,000 shares of stock owned by a corporate CEO to his son.

**Cash Flow from Assets

Operating Cash Flow - Capital Spending - Change in Net Working Capital

d) Agency

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 e) Territorial

e) market value of the firm.

The primary goal of financial management is most associated with increasing the: a) dollar amount of each sale. b) traffic flow within the firm's stores. c) the fixed costs while lowering the variable costs. d) firm's liquidity. e) market value of the firm.

d) the market value of existing stock.

The primary goal of financial management is to maximize: a) current profits. b) market share. c) current dividends. d) the market value of existing stock. e) revenue growth.

d) an agency conflict

The shareholders of Weil's Markets would benefit if the firm were to be acquired by Better Foods. However, Weil's board of directors rejects the acquisition offer. This is an example of: a) a corporate takeover. b) a capital structure issue. c) a working capital decision. d) an agency conflict. e) a compensation issue.

What is the purpose of liquidity ratios?

looking at how well a firm can cover short-term obligations with liquid assets

e) automatically increasing management salaries on an annual basis.

Probably the least effective means of aligning management goals with shareholder interests is: a) he potential for a proxy fight by an unhappy segment of shareholders. b) basing all management bonuses on performance goals. c) holding management salaries steady while increasing stock option grants. d) the threat of a takeover of the firm. e) automatically increasing management salaries on an annual basis.

What are Net Fixed Assets?

Property, Plant, Equipment

d) current market value per share.

The goal of financial management is to increase the: a) future value of the firm's total equity. b) book value of equity. c) dividends paid per share. d) current market value per share. e) number of shares outstanding.

e) primary market

The issuer of a security must be involved in all _____ transactions involving that security. a) exchange-listed b) secondary market c) over-the-counter d) dealer market e) primary market

d) Maximize the market value of the equity

What is the primary goal of financial management for a sole proprietorship? a) Maximize net income given the current resources of the firm b) Decrease long-term debt to reduce the risk to the owner c) Minimize the tax impact on the proprietor d) Maximize the market value of the equity e) Minimize the reliance on fixed costs

b) Compensating managers with shares of stock that must be held for a minimum of three years

Which one of the following is most apt to align management's priorities with shareholders' interests? a) Holding corporate and shareholder meetings at high-end resort-type locations preferred by managers b) Compensating managers with shares of stock that must be held for a minimum of three years c) Paying a special management bonus on every fifth year of employment d) Increasing the number of paid holidays that long-term employees are entitled to receive e) Allowing employees to retire early with full retirement benefits

d) Basing management bonuses on the length of employment

Which one of the following situations is most apt to create an agency conflict? a) Compensating a manager based on his or her division's net income b) Giving all employees a bonus if a certain level of efficiency is maintained c) Hiring an independent consultant to study the operating efficiency of the firm d) Basing management bonuses on the length of employment e) Laying off employees during a slack period

What's worse, high or low liquidity ratios?

"too low" -may have trouble covering short term debt "too high" -too much money in low-return or n return assets

c) the control of a firm is separated from the firm's ownership.

An agency issue is most apt to develop when: a) a firm encounters a period of stagnant growth. b) a firm downsizes. c) the control of a firm is separated from the firm's ownership. d) the firm's owner is also its key manager. e) a firm is structured as a general partnership.

**Quick Ratio

C. Assets - Inventory / Current Liabilities

What is Cash Flow from Assets?

Cash available to Creditors and Stockholders AFTER running the business, and reinvesting

**Current Ratio

Current Assets / Current Liabilties

**Operating Cash Flow

EBIT - Taxes + Depreciation

**Change in Net Working Capital

Ending(Current Assets - Current Liabilities) - Begin(Current Assets - Current Liabilities)

**Capital Spending

Ending(Net Fixed Assets) - Begin(Net Fixed Assets) + Depreciation

What does Capital Spending tell us?

If Capital Spending > 0 it means the firm purchased fixed assets If Capital Spending < 0 it means the firm sold fixed assets

c) secondary market.

You contacted your stock broker this morning and placed an order to sell 300 shares of a stock that trades on the NYSE. This sale will occur in the: a) dealer market. b) over-the-counter market. c) secondary market. d) primary market. e) tertiary market.

What does liquidity mean?

ease of conversion to cash