question

The process of planning and managing a firm's long-term investments is called:

answer

Capital budgeting

question

The mixture of debt and equity used by the firm to finance its operations is called:

answer

Capital structure

question

The management of the firm's short-term assets and liabilities is called:

answer

Working capital management

question

A business owned by a single individual is called a(n)

answer

Sole proprietorship

question

A business formed by two or more individuals or entities is called a(n)

answer

Partnership

question

The primary goal of financial management is to:

answer

Maximize the current value per share of the existing stock

question

The possibility of conflict of interest between the stockholders and management of the firm is called:

answer

the agency problem

question

Agency costs

answer

the costs of the conflict of interest between stockholders and management

question

A stakeholder is:

answer

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

question

The original sale of securities by governments and corporations occurs in the:

answer

primary market

question

The purchase and sale of securities after the original issuance occurs in the:

answer

Secondary market.

question

Which of the following does NOT offer the protection of limited liability? A) corporation B) limited liability company C) sole proprietorship D) limited partnership E) S corporation

answer

C

question

The fundamental goal of financial management should be to:

answer

Maximize the current value per share of the existing stock.

question

You are interested in purchasing 100 shares of stock in a small technology firm that trades in the United States. You would most likely purchase the shares in ________________.

answer

a secondary market operated as a dealer market

question

Which of the following is a FALSE statement concerning corporations? A) The equity that can be raised by the corporation is limited to the current shareholders' personal wealth. B) The life of the corporation is unlimited. C) The corporation has unlimited liability for business debts. D) When dividends are paid, net corporate profits are essentially taxed twice. E) It is relatively simple to transfer ownership of corporate shares.

answer

A

question

Unlimited liability is a characteristic of which of the following form(s) of organization?

answer

sole proprietorship

question

The financial statement showing a firm's accounting value on a particular date is the:

answer

Balance sheet

question

A current asset is:

answer

An item currently owned by the firm that will convert to cash within the next 12 months.

question

Net working capital is defined as:

answer

Current assets - current liabilities

question

The financial statement summarizing a firm's performance over a period of time is the:

answer

Income statement

question

Earnings per share is equal to:

answer

Net income / the total number of shares outstanding

question

Dividends per share is equal to

answer

Dividends paid / the total number of shares outstanding

question

The balance sheet identity states that

answer

Assets = Liabilities + Shareholders' equity

question

Which of the following is FALSE regarding book and market values? A) Financial managers should rely on book values, and not market values, when analyzing the firm's tax liability. B) Financial managers should rely on market values, and not book values, when making decisions for the firm's strategic direction. C) Book value is an accounting summary of value and is inferior to market value as a source of current information regarding the true value of the firm. D) The market value of fixed assets is often difficult to determine. E) Market value always exceeds book value.

answer

E

question

Which of the following is a use of cash?

answer

Dividends paid

question

Which of the following is a source of cash? A) The purchase of new fixed assets. B) Dividends paid. C) The repurchase of outstanding common stock. D) A decrease in long-term debt. E) A decrease in inventory.

answer

E

question

XYZ Company had net income of $40 million in 2002. The firm paid no dividends. If there were no further changes to the stockholders' equity accounts, then ______________ by $40 million.

answer

retained earnings must have increased

question

Activities of the firm that generate cash are known as:

answer

Sources of cash

question

Activities of the firm in which cash is spent are known as:

answer

Uses of cash

question

Financial ratios that measure the firm's ability to pay its bills over the short run without undue stress are known as:

answer

Short-term solvency ratios

question

The current ratio is measured as

answer

Current assets / current liabilities

question

The quick ratio is measured as

answer

Current assets minus inventory, divided by current liabilities

question

The financial ratio measured as total assets minus total equity, divided by total assets, is the

answer

Total debt ratio

question

The debt-equity ratio is measured as:

answer

Total debt / total equity

question

Ratios that measure how efficiently a firm uses its assets to generate sales are known as:

answer

Asset management ratios

question

The financial ratio days' sales in receivables is measured as

answer

365 days / receivables turnover

question

The dividend payout ratio is calculated as

answer

Cash dividends / net income

question

The retention ratio is calculated as

answer

Additions to retained earnings / net income

question

Ratios that measure how efficiently a firm's management uses its assets in operations to generate bottomline net income are known as:

answer

Profitability ratios

question

The financial ratio measured as net income divided by sales is known as the firm's

answer

Profit margin

question

The financial ratio measured as net income divided by total assets is known as the firm's

answer

Return on assets

question

The financial ratio measured as net income divided by total equity is known as the firm's

answer

Return on equity

question

The financial ratio measured as the price per share of stock divided by earnings per share is known as the

answer

Price-earnings ratio

question

The market-to-book ratio is measured as

answer

Market value of equity per share divided by book value of equity per share

question

The __________ breaks down return on equity into three component parts: operating efficiency of the firm, its asset use efficiency, and financial leverage

answer

Du Pont identity

question

Which of the following explicitly appears in the Du Pont identity? A) Debt ratio B) Equity multiplier C) Current ratio D) Times interest earned ratio E) Receivables turnover

answer

Equity multiplier

question

Assume a firm's current ratio equals 3.5. Which of the following actions would increase it?

answer

Paying off a short-term bank loan with the proceeds from new long-term debt

question

Which of the following statements is most correct? a. One of the advantages of the corporate form of organization is that there is no double taxation. b. The partnership form of organization has easy transferability of ownership. c. One of the disadvantages of the sole proprietorship form of organization is that there is unlimited liability. d. Statements b and c are correct. e. None of the statements above is correct.

answer

c. One of the disadvantages of the sole proprietorship form of organization is that there is unlimited liability.

question

Which of the following statements is most correct? a. One advantage of forming a corporation is that you have limited liability. b. Corporations face fewer regulations than sole proprietorships. c. One disadvantage of being a sole proprietor is that you have to pay corporate taxes, even though you don't realize the benefits of being a corporation. d. Statements b and c are correct. e. None of the statements above is correct.

answer

a. One advantage of forming a corporation is that you have limited liability.

question

Which of the following could explain why a business might choose to organize as a corporation rather than as a sole proprietorship or a partnership?

answer

Corporations generally find it easier to raise capital.

question

The primary goal of a publicly-owned firm interested in serving its stockholders should be to

answer

Maximize the stock price per share

question

Which of the following statements is most correct? a. A good goal for a corporate manager is maximization of expected EPS. b. Most business in the U.S. is conducted by corporations; corporations' popularity results primarily from their favorable tax treatment. c. A good example of an agency relationship is the one between stockholders and managers. d. Corporations and partnerships have an advantage over proprietorships because a sole proprietor is subject to unlimited liability, but investors in the other types of businesses are not. e. Firms in highly competitive industries find it easier to exercise "social responsibility" than do firms in oligopolistic industries.

answer

A. A good example of an agency relationship is the one between stockholders and managers.

question

Which of the following statements is most correct? a. A hostile takeover is the main method of transferring ownership interest in a corporation. b. The corporation is a legal entity created by the state and is a direct extension of the legal status of its owners and managers, that is, the owners and managers are the corporation. c. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization. d. In part due to limited liability and ease of ownership transfer, corporations have less trouble raising money in financial markets than other organizational forms. e. Although stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way.

answer

d. In part due to limited liability and ease of ownership transfer, corporations have less trouble raising money in financial markets than other organizational forms.

question

Last year Aldrin Co. had negative net cash flow, yet its cash on the balance sheet increased. What could explain these events?

answer

Aldrin issued long-term debt. Aldrin sold some of its assets

question

Analysts who follow Sierra Nevada Inc. recently noted that, relative to the previous year, the company's net cash flow was larger but cash on the firm's balance sheet had declined. What factors could explain these changes?

answer

The company made a large investment in new plant and equipment

question

Which of the following items is included as part of a company's current assets?

answer

Inventory. Accounts receivable.

question

A start-up firm is making an initial investment in new plant and equipment. Currently, equipment is depreciated on a straight-line basis over 10 years. Assume that Congress is considering legislation that will allow the corporation to depreciate the equipment over 7 years. If the legislation becomes law, and the firm implements the 7-year depreciation basis, which of the following will occur?

answer

The firm's net cash flow will increase

question

All else being equal, which of the following will increase a company's current ratio?

answer

An increase in accounts receivable.

question

Which of the following alternatives could potentially result in a net increase in a company's cash flow for the current year?

answer

Reduce the days sales outstanding ratio.

question

Company J and Company K each recently reported the same earnings per share (EPS). Company J's stock, however, trades at a higher price. Which of the following statements is most correct?

answer

Company J must have a higher P/E ratio

question

Which of the following statements is most correct?

answer

Capital market instruments include long-term debt and common stock

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