Financial Managemenent

Which of the following markets is considered a dealer market? A) The New York Stock Exchange B) The over-the-counter market C) The American Stock Exchange

B) The Over-the-counter market

Which of the following assets is generally considered to be the most liquid? A) Accounts receivable B) Inventory C) Net fixed assets D) A patent or trademark E) Long-term debt

A) Accounts receivable

Which of the following statements accurately describes the relationship between book value and market value? A) Book value is an accounting summary of value and is inferior to market value as information for financial managers B) Market value is rarely different from book value because the economic worth of an asset and/or longterm liability does not change over time C) Financial managers should always evaluate book values, not market values, when making decisions for the firm D) Market value always exceeds book value E) The market value of current assets is often difficult to determine

A) Book value is an accounting summary of value and is inferior to market value as information for financial managers

Which of the following is NOT included in the operating activities portion of a typical Statement of Cash Flows? A) Changes in notes payable B) Changes in accounts payable C) Changes in accounts receivable D) Depreciation E) Net income

A) Changes in notes payable

Which of the following is included in the financing activities portion of a typical Statement of Cash Flows? A) Changes in notes payable B) Depreciation C) Changes in fixed assets D) Net income E) Changes in inventory

A) Changes in notes payable

Which of the following can be computed directly from a pro forma balance sheet? A) Current ratio B) Inventory turnover C) Profit margin D) Additions to net fixed assets E) Interval measure

A) Current ratio

You are interested in purchasing 100 shares of stock in one of the largest corporations in the US. You would most likely purchase the shares in A) a secondary market operated as an auction market B) a primary market operated as an auction market C) a secondary market operated as a dealer market D) a primary market operated as a dealer market E) a secondary market operated as a money market

A) a secondary market operated as an auction market

When a firm chooses to buy new fixed assets it is making a A) capital budgeting decision B) capital structure decision C) financing decision D) working capital decision E) dividend policy decision

A) capital budgeting decision

Which of the following help ensure managers act in the best interest of owners? I. A compensation package for managers that ties their salary to the firm's share price II. The incentives managers have for being promoted or having better job prospects if the firm prospers III. The threat that if the firm does poorly, shareholders will use a proxy fight the replace existing management IV. If there is a high degree of likelihood the firm will become a takeover candidate if the firm performs poorly

All are correct

Which of the following is/are correct regarding agency costs? I. Indirect costs occur when managers, acting to minimize the risk of the firm, forego investments shareholders would prefer they take II. Direct costs occur when shareholders must incur costs to monitor their manager's actions III. Direct costs occur when managers buy assets considered unnecessary by the firm's owners

All are correct

Which of the following is NOT considered one of the basic questions of corporate finance? A) What long-term investments should the firm take B) At what rate of interest should a firm borrow C) Where will the firm get the long-term financing to pay for its investments D) What mixture of debt and equity should the firm use to fund its operations E) How should the firm manage its working capital, i.e., its everyday financial activities

B) At what rate of interest should a firm borrow

Which of the following could be computed with the use of only a balance sheet? A) Interval measure B) Equity multiplier C) Receivables turnover D) Times interest earned E) Return on equity

B) Equity multiplier

A(n) _________ asset is one that can be sold quickly without a significant loss in value. A) fixed B) liquid C) intangible D) current E) long-term

B) Liquid

Which of the following is generally true regarding liquidity as it relates to the firm? A) Liquidity is detrimental to a firm because it allows the firm to pay its bills more easily, thereby avoiding financial distress B) Liquidity is valuable to a firm because liquid assets can be sold quickly without much loss in value C) Liquidity is valuable to a firm because a firm can borrow money using its liquid assets, such as a warehouse, as collateral D) Assets are generally listed in on a firm's balance sheet in the order of increasing liquidity E) Liquid assets generally earn a large return, especially in comparison to illiquid assets

B) Liquidity is valuable to a firm because liquid assets can be sold quickly without much loss in value

The ___________ tax rate is the rate that applies if one more dollar of income is earned and the ___________ tax rate is the total tax bill divided by taxable income. A) marginal; flat B) marginal; average C) flat; marginal D) flat; average E) average; marginal

B) Marginal; average

A(n) ____________ transaction occurs when a firm first sells its shares to the investing public. A) money market B) primary market C) secondary market D) bond market E) cash market

B) Primary market

Which of the following is a factor in computing sustainable growth? A) Current ratio B) Profit margin C) Inventory turnover D) Cash ratio E) Cash coverage ratio

B) Profit margin

A financial manager of a corporation is considering different operating strategies for the coming year. From a financial management standpoint, which of the following would be her optimal strategy? A) To undertake the plan that would reduce the overall riskiness of the firm B) To undertake the plan that would maximize the current stock price C) To undertake the plan that would result in the largest profits for the year D) To undertake the plan that would maximize her personal wealth E) To undertake the plan that would lead to the most stable stock price for the year

B) To undertake the plan the would maximize the current stock price

When does the double taxation problem faced by corporations exist? A) Whenever a corporation earns a profit, pays taxes on that profit, and then pays interest to its bondholders who are taxed B) Whenever a corporation earns a profit, pays taxes on that profit, and then pays dividends to its stockholders who are taxed C) Whenever a corporation earns a profit and pays taxes on that profit D) Whenever a corporation earns a profit, pays taxes on that profit, and then pays interest to its shareholders E) Whenever stockholders are paid a dividend and are taxed on that dividend income

B) Whenever a corporation earns a profit, pays taxes on that profit, and then pays dividends to its stockholders who are taxed

Xman Corp. has just decided to lower its amount of debt outstanding, replacing it with the proceeds from a new equity issue. This adjustment is A) a capital budgeting decision B) a capital structure decision C) a financing decision D) a working capital decision E) a dividend policy decision

B) a capital structure decision

The increase in current assets over current liabilities over a period of time is called _____________. A) capital spending B) changes in net working capital C) operating cash flow D) financing cash flow E) gross income

B) changes in net working capital

. An increase in the financial leverage of a firm as a result of an increase in outstanding debt _______ the potential reward to stockholders while ______ the risk of financial distress or bankruptcy. A) decreases; decreasing B) increases; increasing C) increases; decreasing D) decreases; increasing E) does not affect; increasing

B) increases ; increasing

All else equal, return on equity will increase if the __________. A) profit margin decreases B) return on assets increases C) debt divided by equity decreases D) accounts receivable turnover increases E) total asset turnover decreases

B) return on assets increases

When a firm uses a financial plan to develop, analyze, and compare various scenarios in a consistent way, the firm benefits by better understanding A) the interactions of its operations and changes in intangible assets B) the linkages between different investment proposals C) what the future state of the economy will be D) the feasibility of its past capital budgeting decisions E) the reliability of its employees and management

B) the linkages between different investment proposals

Which of the following statements is a true statement? A) Accounting income is generally equal to cash flow B) Assets are usually listed on the balance sheet at market value C) Accounting statements are usually prepared to match the timing of income and expenses D) The balance sheet equity account represents the market value of the firm to shareholders E) The balance sheet tells investors exactly what the firm is worth

C) Accounting statements are usually prepared to match the timing of income and expenses

According to the balance sheet model of the firm, corporate finance may be thought of as the analysis of three primary subject areas. Which of the following groups correctly lists these three areas? A) Capital structure, capital budgeting, security analysis B) Capital budgeting, capital structure, capital spending C) Capital budgeting, capital structure, net working capital D) Capital structure, net working capital, capital rationing E) Capital budgeting, capital spending, net working capital

C) Capital budgeting, capital structure, net working capital

Which of the following is equivalent to the "balance sheet identity?" A) Total liabilities minus equity equals total assets B) Total liabilities plus total assets equals equity C) Total assets minus total liabilities equals equity D) Total assets minus long-term debt equals equity E) Total assets plus equity equals total liabilities

C) Total assets minus total liabilities equals equity

Suppose a firm is working at full capacity and that assets, costs, and all liabilities are tied directly to the level of sales. Also, the firm pays out all its earnings as dividends and sales are expected to increase by 10% next period. The firm is financed half with equity and half with debt. The external financing needed to support this growth A) is zero since all liabilities are tied directly to the level of sales B) depends on the profit margin (net income /sales) C) is equal to half of the dollar increase in assets D) is equal to twice the dollar increase in liabilities E) is equal to the growth rate times total assets

C) is equal to half of the dollar increase in assets

All else unchanged, a firm's capital intensity ratio will increase if A) accounts payable decrease B) net income increases C) sales decrease D) assets decrease E) cost of goods sold increase

C) sales decrease

In reviewing income statements, a financial manager should ______________. A) base all operating decisions on the "bottom line", i.e., net income B) realize that the income statement is written so as to follow GAAP rules of "realization," which means it is constructed to clearly indicate the firm's cash flow C) ignore noncash deductions since they are typically quite small and have little impact on cash flow D) note that costs on the income statement can be considered fixed or variable, depending on the time horizon considered E) ignore interest expense since it represents a noncash deduction

D) Note that costs on the income statement can be considered fixed or variable, depending on the time horizon considered

When a firm makes decisions regarding its investment in inventory and accounts receivable it is making A) a capital budgeting decision. B) a capital structure decision. C) a financing decision. D) a working capital decision. E) a dividend policy decision.

D) a working capital decision.

When creating pro forma statements, if we assume that costs, assets, and short-term debt vary directly with changes in sales, that the payout ratio is fixed, and that the change in long term debt only results from payments made as required on the debt contracts; then the "plug" required for the balance sheet to balance will probably be _________. A) dividends B) total debt C) long-term debt D) new equity sales E) retained earnings

D) new equity sales

Which of the following is NOT a source of cash for a firm? A) Fixed assets decrease B) Accounts receivable decrease C) Accounts payable increase D) Inventory decreases E) Long-term debt decreases

E) Long-term debt decreases

Which of the following is a use of cash for a firm? A) Fixed assets decrease B) Accounts receivable decrease C) Accounts payable increase D) Common stock and surplus increases E) Notes payable decrease

E) Notes payable decrease

Which of the following is NOT incorporated into calculation of the Du Pont identity? A) Return on assets B) Equity multiplier C) Total asset turnover D) Profit margin E) Receivables turnover

E) Receivables turnover

What does the fixed asset turnover ratio measure? A) How well total assets are utilized during a year B) The length of time it takes a firm to completely replace its fixed assets C) The amount of EBIT a firm generates per dollar of fixed assets D) The percent of total assets that are invested in fixed assets E) The amount of sales each dollar of fixed assets generates

E) The amount of sales each dollar of fixed assets generates

All else equal, which of the following would be considered a use of cash? I. Accounts receivable increase II. Accounts payable decrease III. Common stock and surplus increases IV. Net fixed assets decrease by the amount of depreciation

I and II only

A financial manager is responsible for deciding whether or not new manufacturing equipment should be purchased to replace existing equipment. The new equipment would reduce labor expenses and would allow the firm to reduce its investment in inventory. Which of the financial management areas would be involved in the decision process? I. Capital budgeting II. Capital structure management III. Working capital management

I and III only

If total assets increase by the same percentage as sales increase, I. It is likely assets and sales will increase by identical dollar amounts II. the larger the increase in sales, the more likely there will be a need for external financing III. the firm is assumed to be operating at full capacity

II and III only

Which of the following are considered a source of cash? I. Common stock and surplus decrease II. Accounts payable increase III. Accounts receivable decrease IV. Inventory increases

II and III only