Contemporary Financial Management Ch 1-4 – Flashcards

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According to the Small Business Administration, what percent of all businesses are considered small businesses?
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95%
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Sole proprietorships, partnerships and corporations are the three main forms of business organization. There are other types which are referred to as hybrids. Examples of hybrid business forms are:
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Subchapter S and LLCs
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There are three forms of business organization. Which of the following has unlimited liability?
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General partnership
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Profit maximization has an ambiguous definition of "maximizing profits". Profit maximization fails to consider risk.
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There are problems with using the "profit maximization" criterion.
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____ equals the number of shares outstanding times the market price per share.
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Total shareholder wealth
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One method of decreasing the cash outflows of a firm is to
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decrease dividends
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There is often a divergence between the shareholder wealth maximization goal and the actual goals pursued by management. The primary reason for this is ____.
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separation of ownership and control
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All of the following economic environment factors affect stock prices
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competition tax rates currency exchange rates
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Shareholder wealth is measured by the ____.
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market value of the shareholders' common stock holdings
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The chief financial officer (CFO) normally has responsibility for?
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accounting functions managing interest rate risk trading foreign currencies
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Techniques identified by John Casey that managers could keep in mind when addressing the ethical dimensions of a business problem include
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collect all the facts bearing on the problem clarify the parameters of the problem seek equity for those who may be affected
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When KKR acquired RJR Nabisco, the ____ in the debt ratio, resulted in a(n) ____ in the value of the firm's outstanding bonds.
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increase, decline
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____ arise from the divergent objectives between owners and managers.
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Agency problems
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The most widely accepted objective of the firm is to
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maximize shareholder wealth
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The shareholder wealth maximization goal states that management should seek to maximize the ____ of the expected future returns to the owners of the firm.
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Present value
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In an efficient capital market stock prices provide an unbiased estimate of the true value of an enterprise. In an efficient capital market, stock prices reflect the present value of the firm's expected cash flows.
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market efficiency
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HPR = (3600 - 3000)/3000 × 100% = 20%
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Maher purchased 100 shares of Chill Pill Pharmaceuticals at $30 per share last spring and sold them in six months for $36 per share. The stock paid no dividend. What was Maher's holding period return?
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HPR = ($12 - $14 + $0.24)/$14 = -0.1257 or -12.57%
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You bought 100 shares of Risky Venture stock six months ago for $14 per share and sold it yesterday for $12. The company paid a total of $0.24 per share in dividends to you during the time you held the stock. What was your holding period return?
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($10,000 - $9,450 + $850)/$9,450 = 0.148 or 14.8%
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If a treasury bond can be purchased for $9,450 today and the bond holder will receive $850 in interest and the $10,000 face value at maturity, what is the percentage holding period return?
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dividend policy financial restructurings capital structure policy
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For the financial manager, taxes have important implications for?
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In an efficient capital market, corporate diversification is ____.
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unnecessary
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In an efficient capital market, all security investments will have:
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a NPV of zero
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ex ante; actual; estimated
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Ex post returns differ from ____ returns in that they represent ____ values rather than ____ values.
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insurance companies, pension funds, foreign banks, and investors
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Over the past decade there has been a major shift in the mix of the suppliers of funds in the U.S. capital markets with ____ now providing proportionately more funds.
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____ markets deal in long-term securities having maturities greater than one year.
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Capital
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If the spot rate (in U.S. dollars) for Japanese Yen is 0.00703 and the 180 day forward rate is 0.00717, then the Yen is trading at a(n) ____.
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premium
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$1.20 Canadian $/US dollar
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If the exchange rate from U.S. dollars to Canadian dollars is $0.80/Canadian dollar, then the exchange rate from Canadian dollars to U.S. dollars is?
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futures contracts have a standardized maturity date futures contracts are an exchange-traded agreement futures contracts are "marked to market" daily
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Foreign currency futures are?
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An exchange rate quoted as $1.47 per British pound is known as a ____ quote.
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direct
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difference in purchasing power
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The difference between merchandise exports and imports is known as the ____.
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Market based ratios can be
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Price-to-earnings ratio
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ACP = Rec./2500 = 20, so Rec = 20(2500) = 50,000 CR = CA/CL = 1.3, so CA = 1.3(200,000) =260,000 QR = (CA - Inv)/CL = 0.625, so Inv = $135,000 Cash = 260,000 - 50,000 - 135,000 = $75,000
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Your current assets consist of cash, accounts receivable, and inventory. Total current liabilities equal $200,000. The average collection period is 20 days on average daily credit sales of $2,500. The current ratio is 1.3 and the quick ratio is 0.625. What is the balance in the cash account?
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Cash payment = $1,700 + $2,200 - $1,900 = $2,000
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Stepping Out Shoe Mfg. has inventory purchases of $2,200 during the month of June. If the June 1 accounts payables were $1,700 and June 30 accounts payables were $1,900, what was the cash payment?
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NPM = 15% / 8 = 1.875%
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If a firm has a total asset turnover of 8 times and a return on total assets of 15%, its net profit margin must be?
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Return on investment = Total asset turnover times net profit margin = 4(6.5%) = 26%
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What is the return on investment for a firm that has a debt ratio of 0.65, a net profit margin of 6.5%, sales of $740,000, and a total asset turnover of 4?
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Debt/T.A = 0.5; T.A = $100,000/0.5 = $200,000 Equity = T.A - Debt = $200,000 - $100,000 = $100,000
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Nuking Gnats Pest Service, Inc. has a debt ratio of 50% and an equity multiplier of 2. What is Nuking Gnats' stockholders' equity if total debt is $100,000?
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allowance for funds used during construction
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A component of earnings that recognizes the return that the firm is expected to earn on assets that have not been placed in services is called ____.
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low, high
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Stocks with ____ dividend yield often indicate ____ expected future growth.
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different depreciation methods for taxes and financial reporting
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Deferred taxes may occur due to the use of?
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The ____ ratio is a more severe measure of a firm's ability to meet fixed financial obligations than is the times interest earned ratio.
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fixed charge coverage
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purchase additional inventory on credit
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Christy would like to improve the current ratio of her firm, which is now 0.5, so that she will have a better chance of obtaining a working capital loan. Which of the following options would improve her current ratio?
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comparative analysis and a trend analysis
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Financial ratio analysis is most often performed as a?
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risk
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The greater the amount of financial leverage used by a firm, the greater its ____, all other things being equal.
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accounts receivable
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The quick ratio is the same as current ratio except it does not consider
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____ indicate the firm's capacity to meet its debt obligations, both short-term and long-term.
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Financial leverage ratios
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accounts payable long-term debt
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In the percent-of-sales forecasting method, all of the following balance sheet and income statement items are assumed to increase proportionately with sales?
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Pro forma financial statements
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show the results of some assumed event
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identify potential cash flow problems in advance
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Cash budgeting can be employed effectively by management to?
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The first step in cash budget preparation
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determination of estimated receipts
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Computerized financial planning models may be classified as any of the following except:
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optimistic
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assumed; actual
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Pro forma financial statements show the results of some ____ event rather than a (an) ____ event.
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TFN = $110,000 -$70,000 = $40,000
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Peerless believes that its sales next year will increase 20 percent from the current level of $800,000. Management calculates that assets must increase $110,000 to support the new sales level, and current liabilities will increase $70,000. What total financing will be needed?
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$25,000 = (A/S)(.15S) - ($40,000/S)(.15S) - ($50,000 - $22,000) A = $393,333
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Calculate United's total assets if the firm expects sales to grow 15 percent this year and the earnings after tax will be $50,000. United paid $20,000 in dividends last year and expects to increase dividends 10 percent this year. The firm will need additional financing of $25,000 to finance the expected growth. United started the year with $40,000 in accounts payable; $30,000 in notes payable; and $100,000 in long-term debt. The company is operating at full capacity.
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The financial statement that shows the effects of a company's operating, investing, and financing activities on its cash balance is known as the:
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statement of cash flows
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The Financial Accounting Standard Board (FASB) requires companies to prepare their statement of cash flows using the:
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a. indirect method b. direct method c. reconciliation method d. none of the above
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Which of the following shows the effects of a company's operating, investing, and financing activities on its cash flows?
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statement of cash flows
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The Hudson River Line Company has a balance sheet as of the end of the year as follows:Cash $ 5,000 Accounts Payable $ 15,000 Accounts Receivable 20,000 Notes Payable 10,000 Inventories 40,000 Total Current Liab. 25,000 Total Current Assets $ 65,000 Long-term Debt 30,000 Fixed Assets, net 50,000 Stockholder's Equity 60,000 Total Assets $115,000 Total Liabilities & Equity $115,000 What additional financing will be needed to support the sales increase?
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Full capacity sales = $148,750/0.85 = $175,000 New Sales = $148,750(1.25) = $185,938 $50,000 net fixed assets will support $175,000 in sales. Hence net fixed assets must increase by 50/175, or 0.2857 times sales in excess of capacity, or 0.2857($185,938 - $175,000) = $3,125 AFN = $65,000(0.25) + $3,125 - $15,000(0.25) - ($16,000 - $5,000) = $16,250 + $3,125 - $3,750 - $11,000 = $4,625
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Is an example of a deterministic model?
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budget simulator
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8 - 12 months
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Short-term operational plans are generally conducted over what time frame?
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The first step in the preparation of a cash budget is:
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Estimation of cash receipts
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