Test 1 Review FIN 3312
Sole proprietorship
Margie opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts?
Corporation
Matt and Alicia created a firm that is a separate legal entity and will share ownership of that firm on a 75/25 basis. Which type of entity did they create if they have no personal liability for the firm's debts?
Rotweiler Obedience School's December 31, 2018, balance sheet showed net fixed assets of $1,745,000, and the December 31, 2019, balance sheet showed net fixed assets of $2,080,000. The company's 2019 income statement showed a depreciation expense of $325,000. What was the company's net capital spending for 2019? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)
Net Capital Spending = $2,080,000 - $1,745,000 + $325,000 = $660,000
Risk premium
On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called?
Benson, Inc., has sales of $42,030, costs of $13,650, depreciation expense of $2,950, and interest expense of $2,150. The tax rate is 25 percent. What is the operating cash flow, or OCF? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Operating Cash Flow = EBIT + Depreciation - Taxa. 25,430+ 2,950 - 5,820 = $22,560
any risk that affects a large number of assets.
Systematic risk is defined as:
Total asset turnover
The Wood Shop generates $.97 in sales for every $1 invested in total assets. Which one of the following ratios would reflect this relationship?
beta coefficient.
The amount of systematic risk present in a particular risky asset relative to that in an average risky asset is measured by the:
current market value per share.
The goal of financial management is to increase the:
primary market
The issuer of a security must be involved in all _____ transactions involving that security.
lower; lower
The lower the standard deviation of returns on a security, the _____ the expected rate of return and the _____ the risk.
Agency
The potential conflict of interest between a firm's owners and its managers is referred to as which type of conflict?
market value of the firm.
The primary goal of financial management is most associated with increasing the:
Which one of the following statements is correct?
The primary purpose of the NYSE is to match buyers with sellers.
Systematic
The risk premium for an individual security is based on which one of the following types of risk?
an agency conflict.
The shareholders of Weil's Markets would benefit if the firm were to be acquired by Better Foods. However, Weil's board of directors rejects the acquisition offer. This is an example of:
market risk premium.
The slope of the security market line represents the:
volatility
The standard deviation measures the _____ of a security's returns over time.
market
The systematic risk principle states that the expected return on a risky asset depends only on the asset's ___ risk.
market risk.
Unsystematic risk can be defined by all of the following except:
are difficult to compute.
Which answer creates a false sentence? Percentage returns:
Cash payment of an account payable
Which one of the following actions will increase the current ratio, all else constant? Assume the current ratio is greater than 1.0.
The market value of a firm's fixed assets:
is equal to the estimated current cash value of those assets.
Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $5.8 million. The machinery can be sold to the Romulans today for $8 million. Klingon's current balance sheet shows net fixed assets of $4.6 million, current liabilities of $890,000, and net working capital of $148,000. If all the current accounts were liquidated today, the company would receive $1,005,000 cash. What is the book value of Klingon's total assets today? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) What is the sum of the market value of NWC and the market value of fixed assets? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)
A.) Book value of total assets = $1,038,000 + $4,600,000 = $5,638,000 B.) Sum of market value of NWC and fixed assets = $1,005,000 + $8,000,000 = $9,005,000
All available information
An efficient capital market is best defined as a market in which security prices reflect which one of the following?
Which one of the following situations is most apt to create an agency conflict?
Basing management bonuses on the length of employment
−5.44 percent
Bernard Companies stock has an expected return of 9.5 percent. The stock is expected to return 11 percent in a normal economy and 13.4 percent in a boom. The probabilities of a recession, normal economy, and a boom are 10 percent, 84 percent, and 6 percent, respectively. What is the expected return if the economy is in a recession?
You are given the following information for Ted's Dread Co.: sales = $70,300; costs = $52,500; addition to retained earnings = $4,900; dividends paid = $2,540; interest expense = $2,250; tax rate = 22 percent. Calculate the depreciation expense for the company. (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Calculation of net income:Net income= addition to retained earnings+ dividendNet income= 4900+2540= $7440Net income before tax= 7440/(1-0.22)= $9538.46 Net income before interest, depreciation, andtax= 70300-52500-2250= $15550 Depreciation= 15550-9538.46= 6011.54Depreciation = $6012
You would like to borrow money three years from now to build a new building. In preparation for applying for that loan, you are in the process of developing target ratios for your firm. Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future? You would like to borrow money three years from now to build a new building. In preparation for applying for that loan, you are in the process of developing target ratios for your firm. Which set of ratios represents the best target mix considering that you want to obtain outside financing in the relatively near future?
Cash coverage ratio = 2.6; debt-equity ratio = .3
Which one of the following has nearly the same meaning as free cash flow?
Cash flow from assets
The December 31, 2018, balance sheet of Justin's Golf Shop, Inc., showed current assets of $1,115 and current liabilities of $920. The December 31, 2019, balance sheet showed current assets of $1,330 and current liabilities of $1,005. What was the company's 2019 change in net working capital, or NWC? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)
Change in net working capital = ($1,330 - $1,005) - ($1,115 - $920) = $130
Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?
Common-size income statement
Which one of the following is most apt to align management's priorities with shareholders' interests?
Compensating managers with shares of stock that must be held for a minimum of three years
SDJ, Inc., has net working capital of $2,310, current liabilities of $5,450, and inventory of $1,225. What is the current ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) What is the quick ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Current Ratio = Current Assets / Current Liabilities = $7,760 / $5,450 = 1.42 Quick Ratio = [Current Assets - Inventory] / Current Liabillities = [$7,760 - $1,225] / $5,450 = 1.20
16.60%
If the economy booms, Meyer&Co. stock will have a return of 23.4 percent. If the economy goes into a recession, the stock will have a loss of 11.9 percent. The probability of a boom is 67 percent while the probability of a recession is 33 percent. What is the standard deviation of the returns on the stock?
stock prices should respond only to unexpected news and events.
If the financial markets are efficient then:
A warehouse fire
Which one of the following is the best example of unsystematic risk?
A portfolio comprised solely of U. S. Treasury bills
Which one of the following portfolios will have a beta of zero?
If a risky security is correctly priced, its expected risk premium will be positive.
Which one of the following statements is correct?
Increase in consumption created by a reduction in personal tax rates
Which one of these represents systematic risk?
A high PE ratio may indicate that a firm is expected to grow significantly.
Which one of these statements is true concerning the price-earnings (PE) ratio?
The weights of the securities held in any portfolio must equal 1.0.
Which statement is true?
General partnership
Will and Bill both enjoy sunshine, water, and surfboards. Thus, the two friends decided to create a business together renting surfboards, paddle boats, and inflatable devices in California. Will and Bill will equally share in the decision making and in the business profits or losses. Which type of business did they create if they both have full personal liability for the firm's debts?
secondary market.
You contacted your stock broker this morning and placed an order to sell 300 shares of a stock that trades on the NYSE. This sale will occur in the:
13.39%
You recently purchased a stock that is expected to earn 24 percent in a booming economy, 13 percent in a normal economy, and lose 2 percent in a recessionary economy. There is 24 percent probability of a boom, 61 percent chance of a normal economy, and 15 percent chance of a recession. What is your expected rate of return on this stock?
Probably the least effective means of aligning management goals with shareholder interests is:
automatically increasing management salaries on an annual basis.
Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm's net working capital:
had to decrease.
One example of a primary market transaction would be the:
sale of 1,000 shares of newly issued stock by Alt Company to Miquel.
Operating cash flow is defined as:
the cash that a firm generates from its normal business activities.
An agency issue is most apt to develop when:
the control of a firm is separated from the firm's ownership.