Parisi FI 302

17) Using the information provided, calculate net income for 2013. Assume a tax rate of 35 percent. Year 2013 Inventory $5,000 Revenues 200,000 Depreciation expense 5,000 Cost of goods sold 100,000 Interest expense 10,000 Operating expenses 30,000 A) $35,750 B) $44,000 C) $50,000 D) $19,250

A) $35,750

6) Your firm has the following income statement items: sales of $50,250,000; income tax of $1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest expense of $750,000. What is the amount of the firm's income before tax? A) $4,360,000 B) $750,000 C) $10,865,000 D) $25,115,000

A) $4,360,000 - Explanation: Income Before Tax = Sales - Operating Expenses - Cost of Goods Sold - Interest Expense 50,250,000 - 10,115,000 - 35,025,000 - 750,000 = 4,360,000

5) Which of the basic financial statements is best used to answer the questions "What does the company own and how is it financed?" A) Balance sheet B) Statement of shareholder's equity C) Income statement D) Cash flow statement

A) Balance sheet

5) Which of the following financial instruments is not traded in the capital markets? A) Debt with a maturity of less than one year B) Bonds C) Common stock D) Preferred stock

A) Debt with a maturity of less than one year

17) The price of Netflix stock dropped sharply after customers responded negatively to a change in pricing policies. The change in stock price illustrates which principle? A) Market prices reflect information. B) Individuals respond to incentives. C) Cash flows are the source of value. D) The time-value of money.

A) Market prices reflect information.

15) Which of the following best represents the stream of income that is available to stockholders? A) Net profit after tax B) Earnings before interest, taxes and dividends C) Gross profit D) Operating profit

A) Net profit after tax

2) Which of the following best describes the goal of the firm? A) The maximization of the total market value of the firm's common stock B) Profit maximization C) Risk minimization D) None of the above

A) The maximization of the total market value of the firm's common stock

13) In measuring value, the focus should be on A) cash flow. B) accounting profits. C) time value of money. D) earnings per share.

A) cash flow.

11) Investors choose to invest in higher risk investments because these investments offer higher A) expected returns. B) inflation. C) actual returns. D) future consumption.

A) expected returns.

18) The practice of shifting income from good years to poor years in order to show a record of steady growth is A) known as earnings management and is considered unethical. B) highly recommended but not required by GAAP. C) a basic requirement of accrual accounting. D) impossible if Generally Accepted Accounting Principles are followed.

A) known as earnings management and is considered unethical.

16) Investors prefer $1 today versus $1 in the future due to A) time value of money. B) response to incentives. C) the need for immediate gratification. D) A and B.

A) time value of money.

9) If an investor had a choice of receiving $1,000 today, or $1,000 in five years, which would the average investor prefer? A) $1,000 in five years because they are not good at saving money. B) $1,000 today because it will be worth more than $1,000 received in five years. C) $1,000 in five years because it will be worth more than $1,000 received today. D) Investors would be indifferent to when they would receive the $1,000. E) None of the above.

B) $1,000 today because it will be worth more than $1,000 received in five years.

5) Your firm has the following income statement items: sales of $50,250,000; income tax of $1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest expense of $750,000. What is the amount of the firm's gross profit? A) $18,000,000 B) $15,225,000 C) $5,000,110 D) $6,632,000

B) $15,225,000 - Explanation: Gross Profit = Sales - Cost of Goods Sold 50,250,000 - 35,025,000 = 15,225,000

***Reference Table 2*** 10) Based on the information contained in Table 2, what was the total amount of Bird Industries' common stock dividend for 2012? A) $800 B) $2,300 C) $2,000 D) Cannot be determined with available information

B) $2,300 Explanation: Common Stock Dividend =

7) Your firm has the following income statement items: sales of $50,250,000; income tax of $1,744,000; operating expenses of $8,750,000; cost of goods sold of $35,025,000; and interest expense of $750,000. What is the amount of the firm's net income? A) $255,223 B) $4,731,000 C) $2,616,000 D) $7,775,000

B) $4,731,000 - Explanation: Net Income = Sales - Income Tax - Operating Expenses - COGS 50,250,000 - 1,744,000 - 8,750,000 - 35,025,000 = 4,731,000

***Reference Table 3*** 12) Based on the information contained in Table 3, what was the total amount of Snark Enterprise's common stock dividend for 2012? A) $0 B) $400 C) $600 D) Cannot be determined with available information

B) $400

***Reference Table 2*** 11) Based on the information contained in Table 2, what was Bird Industries' operating profit margin for 22012? A) 21% B) 4.8% C) 4.2% D) 2.4%

B) 4.8%

2) Who owns the retained earnings of a public firm? A) The IRS B) Common stockholders C) Bondholders D) Preferred stockholders

B) Common stockholders

14) Which of the following best represents operating income? A) Income after financing activities B) Earnings before interest and taxes C) Income from capital gains D) Income from discontinued operations

B) Earnings before interest and taxes

10) Why do investors prefer receiving cash sooner rather than later, according to finance theory? A) Incremental profits are greater than accounting profits. B) Money received earlier can be reinvested and returns can be increased. C) Tax considerations are important when investing. D) Diversification leads to increased value.

B) Money received earlier can be reinvested and returns can be increased.

7) Which of the basic financial statements is best used to answer questions about changes in owner's equity that are not explained by the income statement? A) Balance sheet B) Statement of shareholder's equity C) Income statement D) Cash flow statement

B) Statement of shareholder's equity

2) From a financial point of view, a company that decides to develop new product is making A) a financing decision. B) an investment decision. C) a capital structure decision. D) a cash flow decision.

B) an investment decision.

10) Managers of corporations need to act in an ethical manner A) because ethics violations will be punished by the law. B) because a business must be trusted by investors, customer and the public if it is to succeed. C) because business managers must answer to a higher authority. D) because ethical behavior is its own justification.

B) because a business must be trusted by investors, customer and the public if it is to succeed.

5) If managers are making decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should A) positively affect profits. B) increase the market value of the firm's common stock. C) either increase or have no effect on the value of the firm's common stock. D) accomplish all of the above.

B) increase the market value of the firm's common stock.

5) The personal decision to obtain a college degree in business is primarily a(n) ________ decision. A) social B) investment C) ethical D) financing

B) investment

12) Foregoing the earning potential of a dollar today is referred to as the A) time value of money. B) opportunity cost concept. C) risk/return tradeoff. D) creation of wealth.

B) opportunity cost concept.

4) Characteristics of typical bonds include all of the following EXCEPT A) the par value. B) the dividend rate. C) the coupon rate D) the maturity date.

B) the dividend rate.

3) Working capital management refers to A) long-term financing decisions. B) the management of cash flows. C) investing in product development. D) capital structure.

B) the management of cash flows.

4) Stock that is repurchased by the issuing company is called A) paid in capital. B) treasury stock. C) retained capital. D) par value stock.

B) treasury stock.

4) Your firm has the following income statement items: sales of $50,250,000; income tax of $1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest expense of $750,000. What is the amount of the firm's EBIT? A) $15,552,000 B) $58,000,000 C) $5,110,000 D) $4,630,000

C) $5,110,000 - Explanation: EBIT = Sales - Operating Expenses - Cost of Goods Sold 50,250,000 - 10,115,000 - 35,025,000 = 5,110,000

13) Based on the information contained in Table 3, what is Snark Enterprise's gross profit margin in 2012. A) 5.6% B) 4.5% C) 29.7% D) 2.2%

C) 29.7%

8) Your firm has the following income statement items: sales of $52,000,000; income tax of $1,880,000; operating expenses of $9,000,000; cost of goods sold of $36,000,000; and interest expense of $800,000. Compute the firm's gross profit margin. A) 13.5% B) 8.3% C) 30.8% D) 69.2%

C) 30.8% - Explanation: Gross profit margin = (Revenue - COGS) / Revenue (52,000,000 - 36,000,000) / 52,000,000 = 30.8%

6) Which of the following financial instruments entails the most risk and potentially the highest returns for investors? A) Debt with a maturity of less than one year B) Bonds C) Common stock D) Preferred stock

C) Common stock

1) Which of the basic financial statements is best used to answer the question, "How profitable is the business?" A) Balance sheet B) Statement of shareholder's equity C) Income statement D) Accounts receivable aging schedule

C) Income statement

3) Which of the following represents an attempt to measure the earnings of the firm's operations over a given time period? A) Balance sheet B) Cash flow statement C) Income statement D) None of the above

C) Income statement

4) Which of the following goals of the firm is equivalent to the maximization of shareholder wealth? A) Profit maximization B) Risk minimization C) Maximization of the total market value of the firm's common stock D) None of the above

C) Maximization of the total market value of the firm's common stock

7) Which of the following goals is in the best long-term interest of stockholders? A) Profit maximization B) Risk minimization C) Maximizing of the market value of the existing shareholders' common stock D) Maximizing sales revenues

C) Maximizing of the market value of the existing shareholders' common stock

2) Which of the following streams of income is not affected by how a firm is financed (whether with debt or equity)? A) Net profit after tax but before dividends B) Net working capital C) Operating income D) Income before tax

C) Operating income

2) Which of the following is true about Preferred Stock? A) Preferred shareholders always have voting rights. B) If at a time a dividend is due on preferred stock, if the company does not have the funds to pay the dividend, the right of the preferred shareholders to collect that dividend lapses. C) Preferred dividends are not tax deductible to the corporation. D) Like bonds, preferred stock always has a maturity date at which time the issue price must be repaid to shareholders.

C) Preferred dividends are not tax deductible to the corporation.

14) Which of the following is a characteristic of an efficient market? A) Small number of individuals B) Opportunities exist for investors to profit from publicly available information. C) Security prices reflect fair value of the firm. D) Immediate response occurs for new public information.

C) Security prices reflect fair value of the firm.

16) Which of the following is NOT included in operating income? A) Cost of goods sold B) Sales C) Taxes D) Operating expenses

C) Taxes

15) Which of the following factors is most important in investment decisions? A) The change in earnings before taxes. B) The change in gross sales revenue. C) The change in net income. D) The change in after-tax cash flow.

C) The change in net income.

1) Which of the following statements best represents what finance is about? A) How political, social, and economic forces affect corporations B) Maximizing profits C) The study of how people and businesses make investment decisions and how to finance those decisions D) Reducing risk

C) The study of how people and businesses make investment decisions and how to finance those decisions

1) Which of the following is true about bonds? A) They are obligations from the investor to the corporation. B) Their interest rate always varies with the Consumer Price Index. C) They have a fixed maturity, and they pay an amount equal to the maturity value times the coupon rate each year. D) At maturity of the bond, the investor receives the market price of the bond.

C) They have a fixed maturity, and they pay an amount equal to the maturity value times the coupon rate each year.

8) If managers do not pursue the goal of maximizing shareholder wealth A) they concentrate on more important matters like growing market share. B) they can focus more on social responsibilities. C) they are likely to lose their jobs. D) they can focus more on long-term profitability.

C) they are likely to lose their jobs.

***Reference Table 1*** 9) Based on the information given in Table 1, calculate the dividends paid in 1996. A) $3,750 B) $3,000 C) $750 D) $2,250

D) $2,250 Explanation: Dividends Paid = (Old Net Income + New Net Income) - New Retained Earnings (3000+1500) - 2250 = 2250

3) Profit maximization does not adequately describe the goal of the firm because A) profit maximization does not require the consideration of risk. B) profit maximization ignores the timing of a project's return. C) maximization of dividend payout ratio is a better description of the goal of the firm. D) A and B.

D) A and B.

1) Maximization of shareholder wealth as a goal is superior to accounting profit maximization because A) it considers the time value of the money. B) following the shareholder wealth maximization goal will ensure high stock prices. C) accounting profits are not the same as cash flows. D) A and C.

D) A and C.

19) Firms should compare their gross, operating and net profit margins to past years and other companies in order to A) evaluate the firm's performance. B) identify expenses that seem to be out-of-line C) better manage the reporting of the firm's earnings. D) Both A and B.

D) Both A and B.

6) Which of the basic financial statements is best used to answer the questions "Where did the company's money come from and how was it spent over the preceding year?" A) Balance sheet B) Statement of shareholder's equity C) Income statement D) Cash flow statement

D) Cash flow statement

3) Which of the following is not included in computing EBT (earnings before taxes)? A) Marketing expenses B) Depreciation expense C) Cost of goods sold D) Dividends

D) Dividends

1) On the income statement, sales revenue, minus cost of goods sold and operating expenses, equals which of the following? A) Net profit B) Retained earnings C) Net income available to preferred shareholders D) EBIT

D) EBIT

9) What does the agency problem refer to? A) The conflict that exists between the board of directors and the employees of the firm. B) The problem associated with financial managers and Internal Revenue agents. C) The conflict that exists between stockbrokers and investors. D) The problem that results from potential conflicts of interest between the manager of a business and the stockholders.

D) The problem that results from potential conflicts of interest between the manager of a business and the stockholders.

6) Profit maximization is not an adequate goal of the firm when making financial decisions because A) it does not necessarily reflect shareholder wealth maximization. B) it ignores the risk inherent in different projects that will generate the profits. C) it ignores the timing of a project's returns. D) all of the above are correct.

D) all of the above are correct.

4) Finance managers need to interact constantly with A) marketing managers. B) accounting staff. C) management information systems staff. D) all of the above.

D) all of the above.

7) Investors in common stock increase their wealth when the A) the market value of the stock goes up. B) when the stock pays a dividend. D) both A and B.

D) both A and B.

6) The area of finance that deals with long-term investment decisions is known as A) capital structure. B) working capital management. C) financial strategy. D) capital budgeting.

D) capital budgeting.

3) The market for short-term debt is known as A) the bond market. B) the notes market. C) the capital market. D) the money market.

D) the money market.

This comment has an impact over which financial statement, explain. "U.S. stocks sank last week, as concern about everything from China to oil and interest rates spurred strategists to lower their year-end projections for equities."

• Income Statement: Less net income • Balance Sheet: Show lower equity • Interest rate going up for companies, less sales, trying to sell more so more loans for clients, so you're going to • Interest rate going up because liabilities are going up. Less cash flows in the cash flow statement because it's going to be more difficult for companies to get loans

Explain, why does on the Treasury 10-year note to the lowest level in a year while the cost of protecting against default by U.S. junk-rated companies climbed to the highest since 2012?

• Junk bonds are getting riskier, so all of the markets are going down so all of the small companies are not able to pay. Because of high expectation company isn't able to pay, so interest rate for bonds increases. • At the lowest level because people are investing in Treasury Bonds because they are the safest, and inflation is going down. • People are moving to safer (treasury), and there is less inflation

Based on this comment, "The Market iTraxx Europe Senior Financial Index of credit-default swaps rose 12 basis points to 132.68 basis points. An index of swaps tied to junk-rated companies increased for a sixth day, the longest run since October 2014. A gauge of investment-grade swaps rose eight basis points to 118.51 basis points. All three indexes are at the highest since 2013." Explain the implication in the financial statement for no Big US Companies.

• Small companies will be unable to get loans so they will raise money through equity or they will be forced to take on debt or sell the company. Raising money through equity is unlikely because of the uncertainty of the market