Finance Test 1
11) If the rate of interest (r) is 9%, then you should be indifferent about receiving $750 in one year or ________.
$688.07 today
Refer to the income statement above. Assuming that Luther has no convertible bonds outstanding, then for the year ending December 31, 2006 Lutherʹs diluted earnings per share are closest to ________.
$1.03
Refer to the income statement above. For the year ending December 31, 2006 Lutherʹs earnings per share is closest to ________.
$1.03
11) Which of the following features of a corporation is LEAST accurate?
D) Earnings from a corporation are taxed only once.
5) Which of the following is the overarching principle that a financial manager should follow when making decisions?
Decisions should increase the value of the firm to its investors.
17) The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation?
The Colonial Bank would experience a surge in demand for loans.
8) Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the gross margin for 2008 and 2009. What does the change in the gross margin between these two years imply about the company?
The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them fell between 2008 and 2009
17) If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in quick ratio between 2007 and 2008?
The company has increased the risk that it will experience a cash shortfall in the near future.
18) If the above balance sheet is for a retail company, how has the companyʹs leverage changed between 2007 and 2008?
The company has experienced a significant increase in its leverage.
6) The exchanges in which of the following countries or regions do NOT accept the International Financial Reporting Standards set out by the International Accounting Standards Board?
United States
2) What is a firmʹs net income?
all of the above
10) The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP) and verifies that the information reported is reliable is the ________.
auditor
7) A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows?
as an outflow under investment activities
15) Based on the information shown above, how much would you receive from selling 2,000 shares of the above stock?
€40,740
3) The notes to the financial statements would LEAST likely be used for which of the following purposes?
to disclose the financial implications of any off-balance sheet transactions
5) What is the most important duty of a firmʹs financial officer?
to make investment decisions
5) Which of the following best describes why a firm produces financial statements?
to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short- and long-term financial condition of a business
15) If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in the balance sheet between 2007 and 2008?
The company is having difficulties selling its product.
16) If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in stockholdersʹ equity between 2007 and 2008?
The companyʹs net income in 2008 was negative.
23) What is the process of double taxation for the stockholders in a C corporation?
The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them.
2) One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive?
The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement.
6) What is a competitive market?
a market in which a good can be bought and sold at the same price
14) Which of the following firms would be expected to have a high ROE based on that firmʹs high profitability?
a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals
5) A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet?
a patent for a drug held by the company
18) If the exchange rates, after fees, in Tokyo are ¥1,000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 = ¥171, which of the following is most likely to occur?
a surge in conversion of euros to yen in Paris
15) Which of the following balance sheet equations is INCORRECT?
Assets - Current liabilities = Long-term liabilities
22) Which of the following people may not manage the operations of a firm in which they are part or full owners?
limited partners in a limited partnership
8) A 30-year mortgage loan is a ________.
long-term liability
10) Whose interests should a financial manager consider paramount when making a decision?
the stockholders who have risked their money to become owners of the company
Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. If Xenon Manufacturing has 20 million shares outstanding, what is its EPS in 2008 ?
$0.50
19) In a trade with the government of an oil producing nation, a manufacturer will deliver 13 Caterpillar D9 tractors, with a value of $320,000 per tractor, and receive 45,000 barrels of oil, valued at $120 per barrel. What is the net benefit of this trade to the manufacturer?
$1,240,000
Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then Lutherʹs market-to-book ratio would be closest to ________.
1.29
Consider the above Income Statement for CharmCorp. All values are in millions of dollars. If CharmCorp. has 4 million shares outstanding, and its managers and employees have stock options for 2 million shares, what is its diluted EPS in 2008 ?
$1.67
16) You are a shareholder in a corporation which has elected subchapter S tax treatment. The corporation announces a profit of $6 per share, of which it retains $1 for reinvestment and distributes the rest as dividend payments. Given that the personal tax rate is 35%, how much tax must you pay per share?
$1.75
14) Valiant Corp. is a C corporation that earned $3.4 per share before it paid any taxes. Valiant Corp. retained $1 of after-tax earnings for reinvestment and distributed what remained in dividend payments. If the corporate tax rate was 35% and dividend earnings were taxed at 12.5%, what was the value of the dividend earnings received after-tax by a holder of 100,000 shares of Valiant Corp.?
$105,875
25) A company intends to install new management software for its warehouse. The software will cost $47,000 to buy and will cost an additional $148,000 to install and implement. It is anticipated that it will save the company $44,000 through reductions in staff and $69,000 in general inventory costs in the first year after installation. What is the total benefit to the company in the first year if they choose to install the software?
$113,000
Refer to the table above. An international seafood supplier is offered 9.52 million yen today for 1000 pounds of abalone frozen in the shell. One thousand pounds of abalone can be sourced from various countries at the prices shown above. The current market exchange rates between the United States and the other relevant currencies are also shown. In addition, $1 U.S. = 102 yen. What is the value, in U.S. dollars, of the best deal the international seafood supplier can make?
$13,333
Refer to the income statement above. Lutherʹs earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year ending December 31, 2005 is closest to ________.
$135.9 million
10) Stella places a market order with her broker to buy 1,000 shares of OneWorld Corp. The broker buys 1,000 shares at $15.80 each, and sells them to Stella at $15.95 each. He also charges a commission of $12.00. What is bid-ask spread in this case?
$150
As an oil refiner, you are able to produce $77 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $78 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,150 bbl of Alaska North Slope (ANS) crude oil for 10,000 bbl of West Texas Intermediate (WTI) crude oil. Assuming you currently have 10,000 bbl of WTI crude, the added benefit (cost) to you if you take the trade is closest to ________.
$1550
5) A company decides to close down its plastics division. It has on hand 20 tons of styrene monomer, a raw material that has a market price of $800 per ton, which had been originally purchased at $750 per ton. Given that the company has no use for the styrene monomer, and that it would cost the company $5200 to store it, what is the total value of the 20 tons of styrene monomer to the company?
$16,000
Refer to the balance sheet above. What is Lutherʹs net working capital in 2006?
$16.8 million
21) A 2013 Toyota Camry can be bought in Buffalo, NY, for $18,620. The same model Camry can be purchased across the Canadian border in Hamilton, ON. If cars could be freely traded across the border, what would be the expected price of a 2013 Toyota Camry in Hamilton in Canadian dollars, given that $1 U.S. is equal to $0.92 Canadian?
$17,130
13) Helen owns 10.2% of the stock of the Median Corporation. If Median makes a dividend paymentof$25,000,000 paidproportionallytoitsshareholders,howmuchofthisamount would Helen receive, disregarding tax?
$2,550,000
A C corporation earns $4.30 per share before taxes. The corporate tax rate is 35%, the personal tax rate on dividends is 20%, and the personal tax rate on non-dividend income is 39%. What is the total amount of taxes paid if the company pays a $3.00 dividend?
$2.11
Consider the above statement of cash flows. If all amounts shown above are in millions of dollars, what were AOS Industriesʹ retained earnings for 2008?
$2.2 million
21) An S corporation earns $6.00 per share before taxes. The corporate tax rate is 35%, the personal tax rate on dividends is 20%, and the personal tax rate on non-dividend income is 39%. What is the total amount of taxes paid if the company pays a $2.00 dividend?
$2.34
19) A backhoe can dig 180 feet of trench per hour and costs $720 per hour to hire and operate. A ditch digger can dig 6 feet of trench per hour. Based on this information, what is the most a ditch digger can charge for per hour when digging ditches?
$24.0 per hour
17) How much money would a stock exchange make from buying and selling 500 shares of the stock under the conditions shown above?
$250
25) Cronus Airlines has a contract that gives them the opportunity to purchase up to 13,000,000 gallons of jet fuel at $2.00 per gallon. The current market price of jet fuel is $2.3 per gallon. Cronus believes they will only need 4,000,000 gallons of jet fuel. What is the value of this opportunity?
$3,900,000
18) An S corporation earns $9.10 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid if the company pays a $5.00 dividend?
$3.28
19) A C corporation earns $8.30 per share before taxes and the company pays a dividend of $4.00 per share. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the after-tax amount an individual would receive from the dividend?
$3.40
11) A company has a share price of $22.15 and 118 million shares outstanding. Its market-to-book ratio is 4.2, its book debt-equity ratio is 3.2, and it has cash of $800 million. How much would it cost to take over this business assuming you pay its enterprise value?
$3.8 billion
9) In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops. If sales in 2008 and 2009 were steady at $30 million, but the gross margin increased from 2.8% to 3.9% between those years, by what amount was the cost of sales reduced?
$330,000
26) You have a used CD store. At an estate sale, you can purchase 230 compact discs for $356.5. You believe you could sell the CDs for an average of $3.05 each. What is the net benefit of buying the CDs at the estate sale and selling them in your store?
$345
7) An elderly relative offers to sell you their used 1958 Cadillac Eldorado for $52,000. You note that very similar cars are selling on the open market for $87,000. You donʹt care for classic cars and would rather buy a new Ford Explorer for $35,000. What is the net value of buying the Cadillac?
$35,000, since this is the difference between purchase and resale price of the Cadillac.
4) A coin collector treasures his 1969-S doubled die obverse Lincoln cent because he found it in his pocket change, rather than purchasing it. He can sell it on the open market for $35,000, but would only sell it for at least twice that price, due to its sentimental value to him. It is anticipated that the coin will increase in market value in the foreseeable future. What is the value of the coin?
$35,000, since this is the price that the coin would fetch on the open market.
Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then what is Lutherʹs enterprise value?
$385.7 million
As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you currently have 10,000 bbl of WTI crude, the added benefit (cost) to you if you were to sell the 10,000 bbl of WTI crude and use the proceeds to purchase and refine ANS crude is closest to ________.
$3908
17) A C corporation earns $8.30 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid if the company pays a $6.00 dividend?
$4.14
12) Using the above information, how much would you pay for a share of BHP Billiton stock?
$41.93
The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. What is the companyʹs net working capital?
$45 million
The above diagram shows a balance sheet for a certain company. If the company pays back all of its accounts payable today using cash, what will its net working capital be?
$45 million
A McDonaldʹs Big Mac value meal consists of a Big Mac sandwich, large Coke, and a large fries. Assuming that there is a competitive market for McDonaldʹs food items, at what price must a Big Mac value meal sell to insure the absence of an arbitrage opportunity and uphold the Law of One Price?
$5.44
12) If the rate of interest (r) is 8%, then you should be indifferent about receiving $500.00 today or ________.
$540.00 in one year
13) Using the above information, how much would you receive if you sold a share of Washington Post stock?
$677.62
As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you just purchased 9950 bbl of WTI crude at the current market price, the total revenue (cost) to you if you were to refine this crude oil and sell the unleaded gasoline is closest to ________.
$766,150
As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,100 bbl of Alaska North Slope (ANS) crude oil for 9950 bbl of West Texas Intermediate (WTI) crude oil. Assuming you just purchased 9950 bbl of WTI crude at the current market price, the total revenue (cost) to you if you take the trade is closest to ________.
$767,600
As an oil refiner, you are able to produce $77 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $78 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you currently have 10,000 bbl of WTI crude, the total benefits to you if you were to sell the 10,000 bbl of WTI crude and use the proceeds to purchase and refine ANS crude is closest to ________.
$784,091
14) Based on the information shown above, what would it cost to buy 1,000 shares of the above stock?
$91,650
10) GenCorp. has a total debt of $140 million and stockholdersʹ equity of $50 million. It also has 26 million shares outstanding, with a market price of $4.00 per share. What is GenCorpʹs market debt-equity ratio?
1.35
22) On Commodity Exchange A, it is possible to buy and sell crude oil at $116 per barrel, while on Commodity Exchange B crude oil can be bought and sold at $117 per barrel. If there are transaction costs of 1% when buying or selling on either exchange, what is the net effect of buying a barrel of oil on Exchange A and selling it on Exchange B?
-$1.33
The above diagram shows a balance sheet for a certain company. If the company buys new property, plant and equipment today using its entire cash balance, what will its net working capital be?
-$12 million
24) You own 1000 shares of Newstar Financial stock, currently trading for $57 per share. You are offered a deal where you can exchange these stocks for 900 shares of Amback Financial Group stock, currently trading at $63 per share. What is the value of this trade, if you choose to make it?
-$300
Refer to the balance sheet above. Lutherʹs quick ratio for 2006 is closest to ________.
0.87
Refer to the balance sheet above. Lutherʹs current ratio for 2006 is closest to ________.
1.11
15) Manufacturer A has a profit margin of 2.2%, an asset turnover of 1.7 and an equity multiplier of 5.0 . Manufacturer B has a profit margin of 2.5%, an asset turnover of 1.2 and an equity multiplier of 4.7 . How much asset turnover should manufacturer B have to match manufacturer Aʹs ROE?
1.59%
Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then using the market value of equity, the debt -equity ratio for Luther in 2006 is closest to ________.
1.72
8) U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form?
10-K
Refer to the income statement above. Lutherʹs net profit margin for the year ending December 31, 2005 is closest to ________.
11.61%
Refer to the income statement above. Lutherʹs return on equity (ROE) for the year ending December 31, 2005 is closest to ________.
123.56 %
Refer to the income statement above. Lutherʹs return on assets (ROA) for the year ending December 31, 2005 is closest to ________.
17.43 %
Refer to the balance sheet above. When using the book value of equity, the debt-equity ratio for Luther in 2006 is closest to ________.
2.25
12) Convex Industries has inventories of $218 million, current assets of $1.4 billion, and current liabilities of $504 million. What is its quick ratio?
2.35
Refer to the income statement above. Lutherʹs operating margin for the year ending December 31, 2005 is closest to ________.
20.36%
16) What is the bid-ask spread on the stock shown above?
3 cents
23) A metal fabrication company is pricing raw supplies of aluminum. The following are the costs to the company to receive one ton of aluminum from various sources. Which source offers the best price for aluminum per ton?
5888 Brazilian reals per ton, with $0.507 U.S. = 1 BRL
9) Why should you approach every problem by drawing a timeline?
A timeline identifies events in a transaction or investment which might otherwise be easily overlooked.
14) Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information?
A) Company A is less likely than Company B to have sufficient working capital to meet its short-term needs.
3) Which of the following types of firms does NOT have limited liability?
A) sole proprietorships
5) What is the most common type of firms in the United States and the world?
A) sole proprietorships
10) Like other metals, uranium 308 is traded in competitive markets like the New York Metals Exchange. Which of the following would value a given weight of uranium 308 the most?
All buyers and sellers would have the same value for 250 pounds of uranium 308.
10) Consider the above statement of cash flows. Which of the following is true of AOS Industriesʹ operating cash flows?
All of the above are true.
11) Which of the following statements regarding the Law of One Price is INCORRECT?
An important property of the Law of One Price is that it holds even in markets where arbitrage is possible.
15) Which of the following is an example of arbitrage?
An investor, seeing that the price of palladium on the metals exchange in two different countries is slightly different, buys on one and sells on the other to make a profit.
The above data is for four regional trucking firms. Based on price-earnings ratios, which firmʹs stock is the best value?
B) Firm B
20) ʺIf equivalent investment opportunities trade simultaneously in different competitive markets, then they must trade for the same price in both markets.ʺ What do we call the above statement?
B) The Law of One Price
16) Cash is a ________.
Current asset
7) A manufacturer of breakfast cereals has the opportunity to purchase barley at $3.00 a bushel for 10,000 bushels, if it also buys 5,000 bushels of wheat at $16.00 per bushel. However, the manufacturer does not use any barley in its products, and currently needs 20,000 bushels of wheat. If the current market price of barley is $3.80 per bushel and that of wheat is $15.80 per bushel, should this opportunity be taken, and why?
Because the value of the opportunity is positive, the opportunity should be taken.
7) Which of the following would be best considered to be an agency conflict problem in the behavior of the following financial managers?
Bill chooses to pursue a risky investment for the companyʹs funds because his compensation will substantially rise if it succeeds.
10) Why is the personal decision a financial manager makes as to whether to buy or to rent an apartment as a personal residence most like the professional decision that manager makes as to whether her firm should try to acquire a stake in a fast growing new Internet-based company?
Both decisions should be made based upon the tradeoff benefits and costs across time.
25) Which of the following organization forms has the most revenue?
C corporation
9) In which of the following ways is a limited liability company like a corporation?
C) Its ownersʹ liability is restricted to their investment.
7) Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same firm. Which of the following statements regarding their respective relationships to the firm is correct?
C) Janeʹs liability for the firmʹs debts consists solely of her investment in the firm.
6) Which of the following is typically the major factor in limiting the growth of sole proprietorships?
C) The amount of money that can be raised by such firms is limited by the fact that the single owner must make good on all debts.
12) What is the major advantage corporations have over other business entities?
D) All of the above are advantages that a corporation has over other business forms.
10) Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoy protection against the seizure of its property?
D) It is a legally defined, artificial entity that is separate from its owners.
3) Which of the following best describes why the Valuation Principle is a key concept in making financial decisions?
D) It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.
8) What is the major way in which the roles and obligations of the owners of a limited liability company differ from the roles and obligations of limited partners in a limited partnership?
D) The owners of a limited liability company can take an active role in running the company.
4) Over four-fifths of all U.S. business revenue is generated by which type of firms?
D) corporations
6) Which of the stock markets listed below is the smallest, as judged by trading volume?
Deutsche Börse
Above are portions of the balance sheet and income statement for two companies in 2008. Based upon this information, which of the following statements is most likely to be true?
Fixed asset turnover ratios indicate that firm A generating fewer sales for the assets it employs than firm B.
18) Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 at the end of each of the next five years. Steve concludes that in five years he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steveʹs major error in reasoning when making this decision?
He ignores the fact that the costs and benefits of the investment are not stated in the same terms.
9) A typical company has many types of shareholders, from individuals holding a few shares, to large institutions that hold very large numbers of shares. How does a financial manager ensure that the priorities and concerns of such disparate stockholders are met?
In general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment.
12) Why is the stock price of a company an indication of the performance of the companyʹs senior managers?
In general, people want to invest in a well-managed corporation, which will drive up the price of shares.
13) Why is it usually necessary to use the time value of money when performing a cost-benefit analysis?
In most investment projects, costs are incurred up front, but benefits are received in the future.
11) Which of the following statements regarding the cost-benefit analysis is NOT correct?
In the absence of competitive markets, we can use one-sided prices to determine exact cash values.
9) A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company?
Investors believe the companyʹs assets are not likely to be profitable since its market value is worth less than its book value.
The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. If the company has 5 million shares outstanding, and these shares are trading at a price of $6.39 per share, what does this tell you about how investors view this firmʹs book value?
Investors consider that the firmʹs market value and its book value are roughly equivalent.
3) Which of the following is a way that the operating activity section of the statement of cash flows adjusts Net Income from the balance sheet?
It adds all non-cash entries related to a firmʹs operating activities.
4) Which of the following should be true for an asset to be considered liquid?
It can be easily bought and sold and the selling price is very close to the buying price at a given point in time.
An investor has the opportunity to buy a $10,000 government bond which is guaranteed to yield 6.5% interest in one yearʹs time. The investor decides to make the investment as there is a net difference between the absolute cost and benefit. Which of the following is NOT a reason that the investorʹs decision may be flawed?
It does not consider whether the $10,000 will be needed elsewhere.
2) Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned?
It includes cash inflows from services rendered.
4) What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements?
It makes it easier to compare the financial results of different firms.
5) What are the requirements of section 404 of SOX?
It requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process.
The balance sheet and income statement of a particular firm are shown above. What does the account receivable days ratio tell you about this company?
It takes on average about 4 weeks to collect payment from its customers.
6) A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle production plant. How will the cost to the company of this piece of equipment be recorded?
It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows.
4) Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows?
It would be an addition to property, plant and equipment so it would be an investing activity.
Consider the above statement of cash flows. In 2008, AOS Industries had contemplated buying a new warehouse for $3 million, the cost of which would be depreciated over 10 years. If AOS Industries has a tax rate of 25%, what would be the impact for the amount of cash held by AOS at the end of the 2008?
It would have $2,925,000 less cash at the end of 2008.
7) Whose cash flow is best described by the timeline shown below?
Karen, who loans a friend $3,500, which friend then pays back the loan in four annual installments of $1,000
The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. How would the balance sheet change if the companyʹs long -term assets were judged to depreciate at an extra $5 million per year?
Net property, plant, and equipment would fall to $116 million, and total assets and stockholdersʹ equity would be adjusted accordingly.
8) A company that produces racing motorbikes has several models that sell well within the motorcycle racing community and which are very profitable for the company. Despite having a profitable product, why must this company take care to ensure that it has sufficient cash on hand to meet its obligations?
New models will require a lot of money to develop and bring to market before they generate any revenue.
24) You see on Craigslist that a used XBOX 360 sells for $100 and a new XBOX 360 sells for $300. Is this an arbitrage opportunity?
No, because the market fora used XBOX 360 is not the same as the market for a new XBOX 360.
21) Heavy Duty Company, a manufacturer of power tools, decides to offer a rebate of $130 on its 16-inch mid-range chain saw, which currently has a retail price $490. Heavy Dutyʹs marketers estimate that, as a result of the rebate, sales of this model will increase from 60,000 to 80,000 units next year. The profit margin for Heavy Duty before the rebate is $180. Based on the given information, is the decision to give the rebate a wise one?
No, since costs are $6,800,000 more than benefits.
15) Which of the following is unique for an S corporation?
None of the above statements is unique.
16) Why are arbitrage opportunities short-lived?
Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal.
24) A sole proprietorship is owned by ________.
One person
6) Which of the following is the main lesson that analysts and investors should take from the cases of Enron and WorldCom?
Readers of even fraudulent financial statements can spot signs of a firmʹs financial health, if those statements are read fully and with care.
A firm that provides tax services to the public intends to offer a premium tax-return service at a higher price than their current services. The managers of the company ask experts in marketing to determine how much an effective ad campaign for such a service would cost, and by how much sales would increase. They consult experts in economics to calculate the increases in revenue from the success of the campaign, experts in operations to determine the cost of offering the service, and experts in strategy to anticipate possible counter-moves by competitors. Which of the following points about the role of financial managers does this example illustrate?
Real-world decisions are complex and require information from many sources if the decisions are to be valid.
11) Which of the following is a measure of the aggregate price level of collections of pre-selected stocks?
S&P 500
As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,150 bbl of Alaska North Slope (ANS) crude oil for 10,000 bbl of West Texas Intermediate (WTI) crude oil. Assuming you currently have 10,000 bbl of WTI crude, what should you do?
Sell 10,000 bbl WTI crude on the market and use the proceeds to purchase and refine ANS crude.
17) Why must care be taken when comparing a firmʹs share price to its operating income?
Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm.
7) Why is a stock exchange like NASDAQ considered a secondary market?
Shares sold on it are exchanged between investors without any involvement of the issuing corporation.
7) A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true?
Since net working capital is negative, the company will not have enough funds to meet its obligations
11) A companyʹs board of directors chooses to provide a comprehensive health care plan for the families of all employees, despite the large cost. They argue that this will not only increase the number of employees who stay with the firm, and thus reduce some costs involved in employee turnover, but also increase the employeesʹ diligence and industry. What general principle is being argued by the board of directors?
Some activities that decrease shareholdersʹ wealth may have intangible benefits which increase the strength of the company overall.
4) Which of the following best describes why the left and right sides of a balance sheet are equal?
The assets must equal liabilities plus stockholdersʹ equity because stockholdersʹ equity is the difference between the assets and the liabilities.
19) Which of the following statements regarding the balance sheet is INCORRECT?
The balance sheet reports liabilities on the left-hand side.
7) Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the operating margin for 2008 and 2009. What does the change in the operating margin between these two years imply about the company?
The efficiency of Xenon Manufacturing has significantly fallen between 2008 and 2009.
12) Which of the following is the LEAST likely explanation for a firmʹs high ROE?
The firm is growing.
7) Which of the following statements regarding the income statement is INCORRECT?
The income statement shows the cash flows and expenses at a given point in time.
5) A printing company prints a brochure for a client and then bills them for this service. At the time the printing companyʹs financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded?
The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows.
On August 19, 2004 Google IPO offered 19,605,052 shares at a price of U.S. $85 per share, which were sold in an online auction in a bid to make the shares more widely available. Which of the following statements best describes why these are considered a primary market transaction?
The transaction was between the corporation and investors.
8) Which of the following best describes the valuation principle?
The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm.
4) Why in general do financial managers make financial decisions in a corporation, rather than the owners making these decisions themselves?
There are often many owners, and they can often change as they buy and sell stock.
5) Why is it difficult to determine the market price of a private corporationʹs shares at any point in time?
There is no organized market for its shares.
7) Which of the following is NOT a reason why a firmʹs financial managers must take great care when making investment decisions?
These investment decisions determine the corporationʹs mix of debt and equity.
3) Which of the following best explains why market prices are useful to a financial manager when performing a cost-benefit analysis?
They can be used to convert different services and commodities into equivalent cash values which can be compared.
8) What is the main problem in using a balance sheet to provide an accurate assessment of the value of a companyʹs equity?
Valuable assets such as the companyʹs reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet.
10) Which of the following statements is INCORRECT based on the time value of money?
We refer to (1 - rf) as the interest rate factor for risk-free cash flows.
23) Which of the following statements regarding arbitrage and security prices is INCORRECT?
When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds.
A McDonaldʹs Big Mac value meal consists of a Big Mac sandwich, large Coke, and a large fries. Assume that there is a competitive market for McDonaldʹs food items and that McDonaldʹs sells the Big Mac value meal for $4.59. Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on one value meal?
Yes, buy a value meal and then sell the Big Mac, Coke, and fries to make arbitrage profit of $0.67.
14) Walgreens Company (NYSE: WAG) is currently trading at $48.75 on the NYSE. Walgreens Company is also listed on NASDAQ and assume it is currently trading on NASDAQ at $48.50. Does an arbitrage opportunity exist and, if so, how would you exploit it and how much would you make on a block trade of 100 shares?
Yes, buy on NASDAQ and sell on NYSE, make $25.
20) A wholesale food retailer is offered $15.60 per two-layer carton for 5000 cartons of peaches. The wholesaler can buy peaches from their growers at $13.20 per carton. Shipping costs $2.40 per carton, for the first 1000 cartons, and $1.90 per carton for every carton over that. Will taking this opportunity increase the value of the wholesale food retailer?
Yes, the costs are $2000 less than the benefits.
9) Which of the following best explains why you cannot use the price of rolled oats at a local supermarket as the competitive market value of rolled oats?
You can buy the oats at the price posted by the store, but the store will not buy oats from you for the same price.
8) Which of the following situations is best described by the timeline shown below?
You make payments of $250 per month for six months.
27) A limited liability company is essentially ________.
a limited partnership without a general partner
13) Which of the following firms would be expected to have a high ROE?
a grocery store chain that has very high turnover, selling many multiples of its assets per year
Refer to the balance sheet above. The change in Lutherʹs quick ratio from 2005 to 2006 is closest to ________.
an increase of 0.01
9) Consider the above statement of cash flows. What were AOS Industriesʹ major means of raising money in 2008?
by issuing debt
3) How do the shareholders of most corporations exercise their control of that corporation?
by electing members of a board of directors
4) Which of the following is NOT one of the ways that the Sarbanes-Oxley Act sought to improve the accuracy of information given to both boards and shareholders?
by forcing companies to audit financial statements they release
10) What is the most common way that agency conflict problems are addressed in most corporations?
by minimizing the number of decisions that a manager makes where there is a conflict between the managers interests and those of the shareholders
3) WorldCom classified $3.85 billion in operating expenses as long-term investments. How would this make WorldComʹs financial statements more attractive to investors?
by raising its reported earnings
6) The financial manager of a well-regarded book publishing firm wishes to buy a small Internet publishing company to provide an avenue for sale of its materials online. In order to raise the funds to make this purchase, the financial manager decides to sell more stock in the company. How is the financial manager raising funds in this case?
by raising the companyʹs equity by encouraging new owners to take a stake in the company
8) A factory owner wants his workers to produce as many widgets as they can so he pays his workers based on how many widgets they produce. However, in order to make sure that the workers do not rush and produce a large number of poorly made widgets, he checks the widgets at random at various stages of their manufacture. If a defect is found in a widget, the pay of the entire section of the factory responsible for that defect is docked. How is this factory owner seeking to solve the agency conflict problem in this case?
by supplying incentives so the agents act in the way principal desires
13) A corporate raider gains a controlling fraction of the shares of a poorly managed company and replaces the board of directors. How does the corporate raider hope to make a profit in this case?
by the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors
9) The major components of stockholdersʹ equity are ________.
common stock, paid-in surplus, and retained earnings
4) Which of the following is NOT considered to be an operating expense on the income statement?
corporate taxes
17) Accounts payable is a ________.
current liability
4) Which of the following is NOT a function of the board of directors?
day-to-day running of the company
13) Which ratio would you use to measure the financial health of a firm by assessing that firmʹs leverage?
debt-equity or equity multiplier ratio
A firm has contracted to supply 500,000 gallons of propane fuel for $1.46 million to the local municipality. The municipality wants to break the contract. What does the minimum current market price of propane need to be in order for the firm to benefit from breaking the contract?
greater than $2.92 per gallon
14) A ________ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO.
hostile takeover
9) Which of the following is NOT an operating expense?
interest expense
3) Investments by wealthy individuals and endowments is a major source of money for each of the following EXCEPT ________.
mutual funds
6) Which of the following would be more typically the responsibility of a controller rather than a treasurer?
overseeing accounting and tax functions
27) Whenever a good trades in a competitive market, the ________ determines the value of the good.
price
4) Which of the following is NOT a role of financial institutions?
printing money for borrowers
6) A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet?
revenue received for the delivery of items that have not yet been delivered
9) Which of the following is NOT a financial statement that every public company is required to produce?
statement of sources and uses of cash
7) Which of the following is NOT one of the financial statements that must be produced by a public company?
the statement of activities
2) A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, in the firmʹs management discussion and analysis (MD&A)?
that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages
5) In most corporations, to whom does the chief financial officer report?
the CEO
3) Which of the following amounts would be included on the right side of a balance sheet?
the amount of deferred tax liability held by the company
8) A U.S.-based manufacturer of sunscreen is contemplating using funds to purchase courtside advertising at major tennis matches such as the French Open and the Australian Open. Advertising at such well viewed international events will then raise the domestic sales of the manufacturers products. Which of the following factors is the most relevant when analyzing this decision?
the cost of the courtside advertising at the tennis matches
3) What is a firmʹs gross profit?
the difference between sales revenues and the costs
What is the bid-ask spread?
the difference in price available for an immediate sale of a stock and the immediate purchase of the stock
9) In which of the following relationships is an agency conflict problem LEAST likely to arise?
the relationship between a driver and the passengers in a car regarding the safe driving of that car
8) Gross profit is calculated as ________.
total sales - cost of sales
26) Which of the following is NOT an advantage of a sole proprietorship?
unlimited liability