FINC 300-03 Chapter 1 Practice Problems

T/F: According to Generally Accepted Accounting Principles (GAAP), the balance sheet records the market value of assets, liabilities, and equity

False

T/F: As the equity multiplier decreases, the firm's use of debt financing increases relative to equity financing

False

Which one of the following is best suited to raising large amounts of capital? A. Sole proprietorship B. Corporation C. General partnership D. Limited partnership E. None of the above

B. Corporation

Which one of the following is a capital budgeting decision? A. Determining how many shares of stock to issue B. Deciding whether or not to purchase a new machine for the product line C. Deciding how to refinance a debt issue that is maturing D. Determining how much inventory to keep on hand E. Determining how much money should be kept in the checking account

B. Deciding whether or not to purchase a new machine for the product line

A business owned by a solitary individual who has unlimited liability for its debt is called a: A. Corporation B. Sole proprietorship C. General partnership D. Limited partnership E. Limited liability company

B. Sole proprietorship

T/F: Inventory is considered more liquid than accounts receivable but less liquid than cash and cash equivalents

False

T/F: Sole proprietorships and partnerships have limited liability, while corporations have unlimited liability

False

Define Capital Budgeting & Provide an Example

Capital Budgeting - the process of planning and managing a firm's long-term investments Example: evaluating the size, timing, and risk of future cash flows

Define Capital Structure and Provide an Example

Capital Structure - the mixture of debt and equity maintained by a firm Example: Bank Loan - APR

T/F: The overall goal of financial management is to maximize company profits

False

Which one of the following are disadvantages of the partnership form of business ownership? I. Unlimited liability for firm debt II. Double taxation III. Ability to raise capital IV. Unlimited firm life A. I and II only B. I, II, and IV only C. I, II, and III only D. I and III only

D. I and III only

Which one of the following is least likely to be an agency problem? A. Increasing the size of a firm B. Concentrating on maximizing current profits C. Closing a division with net losses D. Increasing the market value of the firm's shares E. Obtaining a patent for a new product

D. Increasing the market value of the firm's shares

Which one of the following is defined as the mixture of a firm's debt and equity financing? A. Working capital management B. Financial allocation C. Agency cost analysis D. Capital budgeting E. Capital Structure

E. Capital Structure

T/F: A positive value for net capital spending represents a cash inflow

False

17. Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $272,160? Taxable income Tax rate $0 - 50,000 15% 50,001 - 75,000 25% 75,001 - 100,000 34% 100,001 - 335,000 39%

Tax Bill=(50,000 x 0.15)+(25,000 x 0.25)+(25,000 x 0.34)+(172,160 x 0.39) Tax Bill=89,392.40 Average tax rate=89,392.40/272,160=0.3285 or 32.85%

Primary goal of financial management

To maximize the current value per share of the existing stock (Create Value for Shareholders)

T/F: An agency problem is defined as a conflict of interest between the firm's shareholders and managers

True

T/F: Capital budgeting is defined as the process of planning and managing a firm's long-term investments

True

T/F: Financial statement analysis is useful in establishing benchmarks for managers' performance evaluation and compensation

True

T/F: Sole proprietorships and partnerships have single taxation, and corporations have double taxation

True

Define Working Capital Management and Provide an Example

Working Capital Management - a firm's short-term assets and liabilities Example: cash and inventory

Define Corporation

a business created as a distinct legal entity owned by one or more individuals/entities

Define Partnership

a business formed by 2+ individuals/entities

Define Sole Proprietorship

a business owned by a single individual

Define Agency Problem

the possibility of conflict of interest between the owners and management of a firm