FIN303 Exam 1
Which of the following are key questions for investments?
What is the best mixture of financial assets to hold? What are the risks and rewards associated with investing? What determines the price of a financial asset?
A common-size balance sheet expresses accounts as a percentage of ______
total assets
Corporations in other countries are often called:
joint stock companies limited liability companies public limited companies
Cash Coverage Ratio
(EBIT + Depreciation)/Interest Expense
Total Debt Ratio Formula
(Total Assets - Total Equity) / Total Assets
The market value of an item is:
the cash value you'd get if you sold it.
For a given time period (t) and interest rate (r), the present value factor is ______ the future value factor.
the reciprocal of 1 divided by
According to the current U.S. corporate tax code, the corporate tax rate in effect for 2021 is ______ percent.
21
True or false: Given the PV, FV, and life of the investment, you can determine the discount rate.
true
Partnership Disadvantages
unlimited liability difficult to transfer ownership
profit margin
Net Income/Sales
Return on Equity Ratio
Net Income/Stockholders Equity
Return on Assets (ROA)
Net Income/Total Assets
Total Asset Turnover Ratio
Sales/Total Assets
What does it mean when a firm has a days' sales in receivables of 45?
The firm collects its credit sales in 45 days on average.
Why is a dollar received today worth more than a dollar received in the future?
Today's dollar can be reinvested, yielding a greater amount in the future.
To calculate the future value of $100 invested for t years at r interest rate, you enter the present value in your calculator as a negative number. Why?
because the $100 is an outflow from you which should be negative
A problem with the TIE ratio is that it is based on EBIT, which is not a measure of ________ available to pay interest.
cash
Future value is the ____ value of an investment at some time in the future.
cash
The federal government taxes which of the following?
corporate earning and shareholder dividends
5 areas of finance
corporate finance investments financial institutions international finance fintech
Inventory Turnover Ratio
cost of goods sold/average inventory
Current Ratio Equation
current assets - current liabilities
New Working Capital equation
current assets - current liabilities
Liabilities can be classified as:
current or long-term
Calculating the present value of a future cash flow to determine its worth today is commonly called ______ valuation
discounted cash flow (DCF)
Cash flow to stockholders
dividends paid out by a firm - net new equity raised
Capital Spending equation
ending net fixed assets - beginning net fixed assets + depreciation
corporate scandals
enron tycon worldcom adelphia
Financial statement analysis is primarily "management by _____ ."
exception
One of the important questions in the area of investments includes the potential risks and reward associated with investing in ___ assets.
financial
financial ratios are developed from a firm's...
financial information
simple interest
interest paid on the principal alone
The times interest earned ratio is a measure of _________-
long-term solvency
When dealing with compound interest, it is more financially advantageous to have a ______ time horizon for investment.
longer
Given an investment amount and a set rate of interest, the ______ the time horizon the ______ the future value.
longer; greater
The price-earnings (PE) ratio is a ______ ratio.
market value
Market to Book Ratio
market value per share/book value per share
A firm may use a price-sales ratio when it has had ______ earnings over the past year.
negative
Which of the following items is added back to EBIT while calculating the cash coverage ratio, but not while calculating the times interest earned ratio?
noncash expenses
A positive operating cash flow indicates that the firm is generating enough cash to:
pay everyday cash outflows.
______ group analysis is a way to establish a benchmark when using ratios.
peer
One of the most important uses of financial statement information within the firm is:
performance evaluation
With discounting, the resulting value is called the ______ value, while with compounding the result is called the ______ value. Multiple choice question.
present; future
Price Earnings Ratio
price per share/earnings per share
Receivables Turnover Ratio
sales / accounts receivable
______ financial statements enable one to compare firms that differ in size.
standardized
Current assets on the common-size balance sheet over the past three years have increased from 32 to 35 percent, while current liabilities have decreased from 29 to 25 percent. This indicates the firm has increased its ______.
liquidity
According to GAAP, when is income reported?
when it is earned or accrued
Investments
work with financial assets (stock and bonds) value of financial assets, risk v. return, and asset allocation
Ensuring that the firm has sufficient funds to continue operations on a day-to-day basis comes under the heading of ______ management.
working capital
Financial Institutions
companies that specialize in financial matter
Under GAAP, assets are generally carried on a firm's balance sheet at Blank______
historical cost, book value
Short-term solvency ratios are also called ______ ratios.
liquidity
Costs incurred during a particular time period that might be reported as selling, general, and administrative expenses are also known as ________.
period costs
In practice, accountants tend to classify costs as either ______ costs or ______ costs.
product; period
Liquidity has two dimensions which are the ability to:
quickly convert assets into cash without significant loss in value.
capital budgeting
the process of planning and managing a firm's long-term investments
careers in financial institutions
insurance broker, risk management, commercial loan officer
cash ratio formula
Cash / Current Liabilities
The three most important items to keep in mind when reviewing an income statement are:
GAAP, cash versus noncash items, and time and costs
What questions can be answered by reviewing a firm's balance sheet?
How much debt is used to finance the firm? What is the total amount of assets the firm owns?
Is profit maximization the primary objective of a business?
No; profit maximization may not take into account other strategic objectives necessary to maximize shareholder value.
True or false: The current ratio will decrease if current assets increase, while everything else remains unchanged.
True
three primary questions that financial managers face:
What long-term investments should be taken on? How will we pay for these investments? How will we manage the day-to-day cash flow needs?
A customer has yet to pay the bill for products purchased from Firm A on credit. This customer's trade credit is recorded in which of Firm A's balance sheet accounts?
accounts receivable
The New York Stock Exchange is a(n) ______.
auction market
ex of financial institutions
banks, credit unions, insurance companies
international finance
covers the international implications of all things finance including financial institutions, corporate finance, and investments
The more debt a firm has, the greater its:
degree of financial leverage
One of the important questions in the area of investments includes the potential risks and reward associated with investing in ______ assets.
financial
traditional financial ratio categories
financial leverage ratios profitability ratios turnover ratios
goal of capital budgeting
find investment opportunities that are worth more to the firm than they cost
Common-size statements are best used for comparing:
firms of different sizes. year-to-year for your firm. competitors.
Depreciation is the accountant's estimate of the cost of _____ used in the production process matched with the benefits produced from owning it.
fixed assets, equipment
A partnership in which partners share in gains or losses and carry unlimited liability for all partnership debts is called a :
general partnership
The purpose of a(n) ______ is to measure performance over a set period of time
income statement
Marginal tax rates are the most important tax rates because:
incremental cash flows are taxed at marginal tax rates. financial decisions are usually based on new cash flows.
Which of the following are defining features of the primary market?
it is the market where initial public offerings are made. Proceeds from the sale of securities go to the issuing firm.
What will happen to the current ratio if current assets increase, while everything else remains unchanged?
it will increase
Long-term solvency ratios measure what aspect of the firm's financial position?
its financial leverage
Corporation Advantages
limited liability unlimited life separation of ownership and management transfer of ownership is easy easier to raise capital
working capital management
managing current assets and current liabilities (working capital)
For financial decision-making purposes, the most important tax rate is the ______ tax rate.
marginal
What should be the goal of a corporation?
maximize the current value per share of the company's existing stock maximize the market value of the existing owners' equity
goal of capital structure
maximize the return on debt and equity investments
Operating cash flow is a sign of trouble if...
negative over a long period of time
treasurer
oversees cash management, capital expenditures, and financial planning
controller
oversees taxes, cost accounting, financial accounting, and data processing
Sole Proprietorship Disadvantages
owner has unlimited liability limited to life of owner difficult to sell ownership
where does cash generated by a corporation typically go?
paid to shareholders and creditors reinvested in the firm to pay corporate taxes
When one owner or creditor sells to another, the transaction takes place in the ______ market.
secondary
Corporation Disadvantages
separation of ownership and management double taxation
The owners of a corporation are called ______.
shareholders
Who is entitled to the residual value of a firm's cash flows?
shareholders
Sole Proprietorship Advantages
simplest business to form with least regulation owners keep all profits taxed once
intention of SOX
strengthen protection against accounting fraud and financial malpractice
operating cash flow
tells us whether or not a firm's cash inflows from its operations are sufficient to cover its everyday cash outflows
capital structure
the mixture of debt and equity maintained by a firm
The officer responsible for managing the firm's cash flows is the ______.
treasurer
What three subjects is the financial manager concerned with?
working capital management capital budgeting capital structure
present value factor?
1 / (1 + r)^t
Long-term liabilities represent obligations of the firm lasting more than ____
1 year
three components of cash flow from assets
1. capital spending 2. change in net working capital 3. operating cash flow
Rank the ease (from easiest to hardest) of turning the following assets into cash
1. cash equivalents 2. accounts receivable 3. inventory 4. plant and equipment
Current assets are defined as assets that can be turned into cash within ______ months.
12
In large firms, financial activity is usually associated with which top officer?
CFO
Careers in Corporate Finance
CFO, CEO, Controller, Treasurer, Financial Manager
Compounding Interest
Earning interest on interest
single-period formula for future value
FV = PV × (1 + r)
multi-period formula for compounding a present value into a future value
FV = PV × (1 + r)^t
single-period present value formula
PV = FV/(1 + r)
Present Value Formula
PV=FV/(1+r)^t
The quick ratio provides a more reliable measure of liquidity than the current ratio especially when the company's inventory takes ______ to sell.
a long time
What does shareholders' equity represent?
a residual claim against the firm's total assets
What is depreciation?
a systemic expensing of an asset based on the asset's estimated life
Tax rates for proprietorships, partnerships, and LLCs ______ with the passage of the Tax Cuts and Jobs Act of 2017.
changed
financial ratios are used for ______ purposes
comparison
SOX disadvantages
compliance very costly go public outside US go dark inside US
Goal of working capital management
ensure the firms has sufficient resources to continue operations on a daily basis
how to capital budget
evaluate size, timing, and risk of future cash flows
how to: capital structure
evaluate size, timing, and risk of future cash flows
how to: working capital management
evaluate size, timing, and risk of future cash flows
True or false: Financial ratios are computed using only balance sheet information.
false
True or false: Blue Company and Red Company have equal levels of current assets and current liabilities. Blue Company has higher inventory levels than Red Company. Blue Company is more liquid than Red Company.
false; Higher levels of inventory result in less liquidity, all else equal.
True or false: If a company has inventory, the quick ratio will always be greater than the current ratio. why?
false; If a company has inventory, the quick ratio will always be less than the current ratio.
An organization must prepare ______ and bylaws when forming a corporation. Multiple choice question.
articles of incorporation
True or false: The Sarbanes-Oxley Act provides incentives for companies to go public in U.S. markets.
False
why do financial managers use a common-size income statement?
The common-size income statement can show sources of cash for the company.
If a company has inventory, the quick ratio will always be ______ the current ratio.
less than
Partnership Advantages
relatively easy to start more capital than sole proprietorship taxed once
In a common-size income statement, each item is expressed as a percentage of total ....
sales
careers in investments
stockbroker, financial advisor, portfolio manager, security analyst
A corporation receives cash from financial markets by selling ______ and ______.
stocks and bonds
