Financial Management Exam 1 Review

Which one of the following best states the primary goal of financial management? A)Maximize the current value per share. B) Maintain steady growth while increasing current profits. C) Maximize current dividends per share. D) Minimize operational costs while maximizing firm efficiency. E) Increase cash flow and avoid financial distress.

A)Maximize the current value per share.

Which one of the following statements is correct? A) If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0. B) Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5. C)An increase in the depreciation expense will not affect the cash coverage ratio. D) The debt-equity ratio can be computed as 1 plus the equity multiplier. E) An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity.

C) An increase in the depreciation expense will not affect the cash coverage ratio.

The cash flow of a firm that is available for distribution to the firm's creditors and stockholders is called the: A) Net capital spending. B) Operating cash flow. C) Cash flow from assets. D) Net working capital. E) Cash flow to stockholders.

C) Cash flow from assets.

What is defined as the management of a firms long-term investments?

Capital Budgeting

What is defined as the mixture of a firms debt and equity financing?

Capital Structure

An increase in current liabilities will have which one of the following effects, all else held constant? Assume all ratios have positive values. A) Increase in the cash ratio. B) Increase in the current ratio. D) Decrease the quick ratio. C) Decrease in the cash coverage ratio. E) Increase in the net working capital to total assets ratio.

D) Decrease the quick ratio

For a tax-paying firm, an increase in ________ will cause the cash flow from assets to increase.

Depreciation

A limited partnership: A) Terminates at the death of any limited partner. B) Can opt to be taxed as a corporation. C) Consists solely of limited partners. D) Has an unlimited life. E) Has a greater ability to raise capital than a sole proprietorship

E) Has a greater ability to raise capital than a sole proprietorship

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of: A) Total equity. B) Taxable income. C) Total assets. D) Net income. E) Sales

E) Sales

What is the financial statement that summarizes a firm's revenue and expenses over a period of time?

Income Statement

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _________ ratios

Profitability

What are the three points of the DuPont identity?

-Equity Multiplier -Profit Margin -Total Asset Turnover

Which one of the following statements related to taxes is correct? A) The marginal tax rate for a firm can be higher than or equal to the average tax rate. B) Additional income is taxed at a firm's average tax rate. C) Given the tax structure in 2014, the highest average corporate tax rate is 34 percent. D) The marginal tax rate must be equal to or lower than the average tax rate for a firm. E) The tax for a firm is computed by multiplying the firm's current marginal tax rate times the taxable income.

A) The marginal tax rate for a firm can be higher than or equal to the average tax rate.

A stakeholder is...

Any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.

Which one of the following is a source of cash? A) Decrease in accounts payable B) Decrease in inventory C) Decrease in common stock D) Increase in accounts receivable E) Increase in fixed assets

B) Decrease in inventory

Cash flow to stockholders is defined as: A) Operating cash flow minus the cash flow to creditors. B) Dividends less net new equity raised C) Cash flow from assets plus the cash flow to creditors. D) The change in total equity over the past year. E) The total amount of interest and dividends paid during the past year.

B) Dividends less net new equity raised

The most acceptable method of evaluating the financial statements of a firm is to compare the firm's current: A) Financial statements to the projections that were created based on Tobin's Q. B) Financial ratios to the firms historical ratios. C) Financial statements to the financial statements of similar firms operating in other countries. D) Financial statements to those of larger firms in unrelated industries. E) Financial ratios to the average ratios of all firms located within the same geographic area.

B) Financial ratios to the firms historical ratios.

Public offerings of debt and equity must be registered with which one of the following? A) NYSE Registration Office. B)Securities and Exchange Commission C) New York Board of Governors. D) Market Dealers Exchange. E) Federal Reserve.

B)Securities and Exchange Commission

What is the financial statement that shows the accounting value of a firm's equity as of a particular date?

Balance Sheet

Al's has a price-earnings ratio of 18.5. Ben's also has a price-earnings ratio of 18.5. Which one of the following statements must be true if Al's has a higher PEG ratio than Ben's? A) Al's has a higher market value per share than does Ben's. B) Al's has a higher earnings growth rate than Ben's. C) Ben's is increasing its earnings at a faster rate than Al's. D) Al's has more net income than Ben's. E) Ben's has a lower market-to-book ratio than Al's.

C) Ben's is increasing its earnings at a faster rate than Al's. PEG Ratio= Price Earnings Ratio/Earnings Growth Rate

Which of the following are cash flows from a corporation into the financial markets? I. Repayment of long-term debt. II. Payment of government taxes. III. Payment of loan interest. IV. Payment of quarterly dividend. A) I and III only. B) I and II only. C) I, III, and IV only. D) I, II, and III only. E) II and IV only.

C) I, III, and IV only.

Which one of the following is true according to generally accepted accounting principles? A) Costs are recorded based on the realization principle. B) Depreciation is recorded based on the market value principle. C) Income is recorded based on the realization principle. D) Costs of goods sold are recorded based on the matching principle. E) Depreciation is recorded based on the recognition principle.

C) Income is recorded based on the realization principle.

Which one of these identifies the relationship between the return on assets and the return on equity? A) Profit margin. B) Profitability determinant. C) Debt-equity ratio. D) DuPont Identity .E) Balance sheet multiplier.

D) DuPont Identity

An increase in which of the following will increase the return on equity, all else constant? I. Total asset turnover. II. Net income.III. Total assets.IV. Debt-equity ratio. A) I, II, and III only. B) I, II, III, and IV. C) I only. D) I, II, and IV only. E) I and II only.

D) I, II, and IV only.

Financial managers should primarily focus on the interests of: A) Stakeholders. B) The vice president of finance. C) The board of directors. D) Shareholders E) Their immediate supervisor.

D) Shareholders

Ratios that measure a firm's liquidity are known as ________ ratios. A) Book value. B) Asset management. C) Profitability. D) Short-term solvency. E) Long-term solvency.

D) Short-term solvency

Which one of the following statements related to an income statement is correct? A) Interest expense is included in operating cash flow. B) Net income is distributed to dividends and paid-in surplus. C) Depreciation does not affect taxes since it is a non-cash expense. D) Taxes reduce both net income and operating cash flow. E) Interest expense increases the amount of tax due.

D) Taxes reduce both net income and operating cash flow.

The Sarbanes-Oxley Act of 2002 is a governmental response to: A) Decreasing corporate profits. B) Deregulation of the stock exchanges. C) The terrorists attacks on 9/11/2001. D)Management greed and abuse. E) A weakening economy.

D)Management greed and abuse.

Activities of a firm that require the spending of cash are known as: A) Cash collections. B) Cash on hand. C) Sources of cash. D) Cash receipts. E) Uses of cash

E) Uses of cash