Finance Exam 1
Which of the following represents the most liquid asset?
$500 worth of inventory that is sold today for $500
You recently purchased a restaurant that had equal market and book values. The purchase included the building, fixtures, and inventory. Which one of the following would be most likely to cause the market value of the restaurant to fall below its book value? - A sudden and unexpected increase in inflation - the replacement of old menu items w more desirable products
A pandemic that required restaurants to limit the number of customers allowed inside
Which one of the following accounts is the most liquid? Inventory Building Acct Rec Equipment Land
Accounts Receivable
For a corporation that earned positive taxable income, which one of the following statements is correct? - Net income divided by the number of shares outstanding will equal the dividends per share. - An increase in depreciation expense will increase the operating cash flow. - An increase in the tax rate will increase both net income and operating cash flow.
An increase in depreciation expense will increase the operating cash flow.
Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?
Balance Sheet
Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date? - Income Statement - Creditor's statement - Balance sheet - Statement of cash flows - Dividend Statement
Balance sheet
Which one of the following standardizes items on the income statement and balance sheet relative to their values as of a chosen point in time? - Base reconciliation statement - Common-base year statement - Statement of cash flows
Common-base year statement
Which one of the following is classified as a tangible fixed asset?
Computer equipment NOT cash
Which is correct about corporations?
Corps can have an unlimited life
On the statement of cash flows, which one of the following is considered an operating activity? - Increase in net fixed assets - Dividends paid - Decrease in accounts payable - Purchase of equipment
Decrease in accounts payable
Which one of the following is a disadvantage of the corporate form of business?
Distributed profits may experience double taxation
The relationship between the return on assets and the return on equity is identified by the: - balance sheet multiplier - DuPont identity. - debt-equity ratio.
DuPont identity.
Which one of the following accurately lists the three components of the DuPont identity?
Equity multiplier, net profit margin, and total asset turnover
Which one of the following statements is correct? - Financial statements are rarely used as the basis for performance evaluations. - Book values should always be given precedence over market values. - Historical information is useful when projecting a company's future performance. - Potential lenders place little value on financial statement information. - Reviewing financial information over time has very limited value
Historical information is useful when projecting a company's future performance.
Which one of the following questions involves a capital structure decision? - Which one of two project proposals should the firm implement? - How should the firm allocate its limited available funds among acceptable projects? - How much debt should the firm incur to fund a project? - How much funding should be allocated to financing customer purchases of a new product?
How much DEBT should the firm incur to fund a project?
Which one of the following questions is a working capital management decision? - How much money should the company borrow to buy a new building? - How much inventory should the company keep on hand? - Should the company issue new shares of stock or borrow money?
How much inventory should the company keep on hand?
The DuPont identity can be used to help managers answer which of the following questions related to a company's operations? I. How many sales dollars are being generated per each dollar of assets? II. How many dollars of assets have been acquired per each dollar in shareholders' equity? III. How much net profit is being generated per dollar of sales? IV. Does the company have the ability to meet its debt obligations in a timely manner?
I, II, III only
Which of the following items are included when calculating the expected return on a portfolio? I. Percentage of the portfolio invested in each individual security II. Projected states of the economy III. The performance of each security given various economic states IV. Probability of occurrence for each state of the economy - I and III only - I, III, and IV only - I, II, III, and IV
I, II, III, and IV
Which one of the following questions is least likely to be addressed by financial managers? - Should the firm acquire new equipment? - In which region of the country should a new product be launched? - Should the firm pay off its debt early?
In which region of the country should a new product be launched? - yes to credit purchases, debt, buying new equipment, cash on hand
Which one of the following statements related to an income statement is correct? - Depreciation does not affect taxes since it is a noncash expense. - Income taxes reduce both net income and operating cash flow. - Net income is distributed to dividends and paid-in surplus.
Income taxes reduce both net income and operating cash flow.
Which one of the following is classified as a current asset? Acct Pay Patent Inventory Notes Pay Office furniture
Inventory
Of the options listed below, which is the best example of systematic risk? - Investors panic causing security prices around the globe to fall precipitously. - A flood washes away a firm's warehouse. - A city imposes an additional one percent sales tax on all products. - A toymaker has to recall its top-selling toy.
Investors panic causing security prices around the globe to fall precipitously.
Which of the following statements regarding unsystematic risk is accurate? - It can be effectively eliminated by portfolio diversification. - It is compensated for by the risk premium. - It is measured by beta. - It is measured by standard deviation.
It can be effectively eliminaeliminated by portfolio diversification.ted by portfolio diversification.
Which one of the following statements related to liquidity is correct? - Any asset that can be sold for cash is considered liquid - Liquid assets are valuable to a firm - Liquid assets tend to earn a higher rate of return than illiquid assets
Liquid assets are valuable to a firm
Which one of the following is excluded from a firm's accounting value, but included in its market value?
Recognition of firm's brand
An investor wants to reduce the unsystematic risk in her portfolio. Which of the following actions is least likely to do so? - Reducing the number of stocks held in her stock portfolio - Adding bonds to her stock portfolio
Reducing the number of stocks held in her stock portfolio
Which one of the following is a primary market transaction? - Sale of currently outstanding stock by a dealer to an individual investor - Sale of a new share of stock from a corporation to an individual investor - Transfer of stock ownership from one shareholder to another shareholder
Sale of a new share of stock from a corporation to an individual investor
Which one of the following questions involves a capital budgeting decision? - How many shares of stock should the firm issue? - Should the firm purchase a new machine for the production line? - How much inventory should the firm keep on hand?
Should the firm purchase a new machine for the production line?
Which of the following statements best describes the principle of diversification? - Concentrating an investment in two or three stocks will eliminate all of the unsystematic risk. - Spreading an investment across multiple diverse companies will not lower the total risk. - Spreading an investment across many diverse assets will eliminate all of the systematic risk. Spreading an investment across many diverse assets will eliminate some of the total risk.
Spreading an investment across many diverse assets will eliminate some of the total risk.
A positive cash flow to stockholders indicates which one of the following with certainty? - Both the cash flow to assets and the cash flow to creditors must be positive. - The dividends paid exceeded the net new equity raised. - The amount of the sale of common stock exceeded the amount of dividends paid.
The dividends paid exceeded the net new equity raised.
When using economic probabilities to compute the expected return on a stock, the result is: - guaranteed to equal the actual average return on the stock for the next five years. - guaranteed to be the minimal rate of return on the stock over the next two years. - a mathematical expectation based on a weighted average and not a guaranteed outcome. - guaranteed to equal the actual return for the immediate twelve month period.
a mathematical expectation based on a weighted average and not a guaranteed outcome.
Corporate dividends represent: - tax-free income for the recipient because they are distributions of aftertax income. - aftertax income from the corporation which becomes taxable income for the recipient - pretax income from the corporation which becomes taxable income for the recipient
aftertax income from the corporation which becomes taxable income for the recipient
total equity = ?
assets - liabilities - DEBT
Determining the number of shares of stock to issue is an example of a ______ decision. - capital rationing - net working capital - capital structure - capital allocation
capital structure
The cash flow that is available for distribution to a corporation's creditors and stockholders is called the: - operating cash flow - net working capital - cash flow from assets - cash flow to stockholders
cash flow from assets
Which form of business would be the best choice if it were necessary to raise large amount of capital?
corporation
Who sells to who in primary market?
corporation is the seller and the transaction raises money for the corporation
Agency problems are most likely to be associated with:
corporations
A firm's liquidity is measured with which one of the following ratios?
current ratio
All other things beings equal, and assuming all ratios have positive values, an increase in current liabilities will:
decrease the quick ratio
Corporate bylaws: - define the name by which the firm will operate - describe how a corporation regulates itself - determine how a corp regulates itself
determines how a corp regulates itself
Cash flow to stockholders is defined as: - the change in total equity over the past year. - the total amount of interest and dividends paid during the past year. - dividend payments less net new equity raised.
dividend payments less net new equity raised.
While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the: - arithmetic return. - historical return. - expected return. - geometric return.
expected return.
As the degree of financial leverage increases the probability a firm will encounter financial distress...
increases
Which one of the following is an expense for accounting purposes, but is not an operating cash flow for financial purposes? - interest expense - COGS - labor costs - admin expenses
interest expense
The Sarbanes-Oxley Act of 2002 holds a public company's ______ responsible for the accuracy of the company's financial statements.
managers
When calculating the expected rate of return on a stock portfolio using a weighted average, the weights are based on the: - number of shares owned of each stock. - market price per share of each stock. - market value of the investment in each stock. - original amount invested in each stock.
market value of the investment in each stock.
Which one of the following best states the primary goal of financial management? - avoid financial distress - maintain steady growth while increasing current profits - maximize the current value per share
maximize the current value per share
A firm's ______ is the firm's mix of short-term assets and short-term liabilities. - net working capital - net debt - net currency - capital structure
net working capital
Who does the secondary market involve?
one owner or creditor selling to another
Which one of the following would cause a cash outflow from a corporation? - paying dividends - issuing new securities - taking out a loan from a bank - receiving a tax refund from the govt
paying dividends
Which one of the following is a cash flow from a corporation into the financial markets? - borrowing of long-term debt - payment of govt taxes - payment of loan interest - issuance of corp debt
payment of loan interest
Buchi owns several financial instruments: stocks issued by seven different companies, plus bonds issued by four different companies. Her investments are best described as a(n): - index - porfolio - collection - grouping
portfolio
Rafia owns stocks of 15 different companies. Together, the stocks have a value of $78,640. Twelve percent of that total value is from one company, Gambrell & Valdez. The twelve percent figure is called a(n): - portfolio return - portfolio weight - degree of risk - price-earnings ratio
portfolio weight
As the degree of financial leverage increases, the: - probability a firm will encounter financial distress increases - amount of a firm's total debt decreases - number of outstanding shares of stock increases
probability a firm will encounter financial distress increases
As the degree of financial leverage increases, the: - probability a firm will encounter financial distress increases. - less debt a firm has per dollar of total assets - accounts payable balance decreases.
probability a firm will encounter financial distress increases.
Shareholder's equity...
represent the residual of a firm
Shareholders' Equity: - is referred to as a firm's financial leverage - is equal to total assets plus total liabilities - represent the residual value of a firm - includes patents, preferred stock and common stock - decreases whenever new shares of stock are issued
represent the residual value of a firm
To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return. - expected market rate of return - risk-free rate - inflation rate - standard deviation
risk-free rate
A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:
sales
Ultimately, the ______ control(s) the corporation.
shareholders
A firm owned by a single person who has unlimited liability for the firm's debt is called a:
sole proprietorship
The sources and uses of cash over a stated period of time are reflected on the: - balance sheet - income statement - statement of cash flows - statement of operating position
statement of cash flows
An unexpected post on social media caused the prices of 22 different companies' stocks to immediately increase by 10 to 15 percent. This occurrence is best described as an example of ________ risk. - portfolio - nondiversifiable - market - unsystematic
unsystematic
