Principles of Finance Ch 1-3 Test – Flashcards
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The conflict between the goals of a firm's owners and the goals of its non-owner managers is
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the agency problem
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Managerial finance
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involves tasks such as budgeting, financial forecasting, cash management, and funds procurement.
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Under which of the following legal forms of organization, is ownership readily transferable?
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Corporation
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Agency costs include all of the following EXCEPT
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management reports to stockholders.
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The wealth of the owners of a corporation is represented by
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share value
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Career opportunities is financial services include all of the following EXCEPT
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capital expenditures management.
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As the risk of a stock investment increases, investors'
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require rate of return will increase.
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The primary emphasis of the financial manager is the use of
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cash flow.
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Profit maximization as the goal of the firm is NOT ideal because
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profit maximization does not consider risk.
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All of the following as considered stakeholders EXCEPT
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competitors.
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The accountant recognizes revenues and expenses on
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an accrual basis.
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Wealth maximization as the goal of the firm implies enhancing the wealth of
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the firm's stockholders.
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One way often used to insure that management decisions are in the best interest of the stockholders is to
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tie management compensation to the performance of the company's common stock price.
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Which of the following legal forms of organization's income is NOT taxed under individual income tax rate?
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Corporation.
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Economic theories that the financial manager must be able to utilize for efficient business operations, include
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all of the above- marginal analysis, profit-maximizing strategies, price theory, supply-and-demand analysis.
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The part of finance concerned with design and delivery of advice and financial products to individuals, business, and government is called
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Financial Services.
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About 75 percent of all business firms are
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sole proprietorships.
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An ethics program is expected to have a _________ impact on the firm's share price.
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positive
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Corporate owner's receive realizable return through
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increase in share price and cash dividends.
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A recent ethics survey indicated the opinion that maintaining high ethical standards
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strengthened a firm's competitive position.
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Trading is carried out on the floor of the New York Stock Exchange by
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the auction process.
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Firms that require funds from external sources can obtain them from
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all of the above- financial markets, financial institutions, private placement.
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The ______ market is where securities are initially issued and the _______ market is where pre-owned securities (not new issues) are traded.
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primary; secondary
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The Gramm-Leach-Biley Act
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allows business combinations between commercial banks, investment banks and insurance companies.
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All of the following are functions of security exchanges EXCEPT
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holding demand deposits.
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If a corporation sells certain capital equipment for more than their initial purchase price, the difference between the sale price and the purchase price is called
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capital gain
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The key participants in financial transactions are individuals, businesses, and governments. Individuals are net _______ of funds, and businesses are net ________ of funds.
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suppliers; demanders
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The tax deductibility of various expenses such as general administrative expenses _______ their after-tax cost.
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reduces
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In an efficient market if a company announced sales of a new product are lower than expected, what would you expect to happen to the stock price?
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It would decrease
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Long-term debt instruments used by both government and business are known as
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bonds.
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All of the following are true about mortgage-backed securities EXCEPT:
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All of the cash flows from these securities are guaranteed by the U.S. government.
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Which of the following are forums in which suppliers and demanders of funds can transact business directly?
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Financial Markets
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All of the following are true EXCEPT
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Corporations pay taxes on all dividends received from other corporations, no matter their share of ownership.
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The over-the-counter (OTC) market is
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an intangible market for unlisted securities.
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Which of the following provide savers with a secure place to invest funds and offer both individuals and companies loans to finance investments?
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Commercial Banks
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Which of the following assist companies in raising capital, advise firms on major transactions such as mergers or financial restructuring, and engage in trading and market making activities?
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Investment Banks
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Most businesses raise money by selling their securities in a
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public offering.
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A competitive market that allocates funds to their most productive use is called an
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efficient market.
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When home prices are falling we would expect
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high mortgage default rates.
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The major securities traded in the capital markets are
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stocks and bonds.
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The ________ ratio may indicate that the firm will not be able to meet interest obligations due on outstanding debt.
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times interest earened
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The rule-setting body, which authorizes GAAP is
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FASB.
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The ________ measures the percentage of profit earned on each sales dollar before interest and taxes.
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operating profit margin
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A firm has a current ratio of 1; in order to improve its liquidity ratios, this firm might
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decrease current liabilities by utilizing more long-term debt, thereby increasing the current and quick ratios.
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________ analysis involves the comparison of different firms' financial ratios at the same point in time.
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Cross-sectional
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Net profits after taxes are defined as
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EBIT minus interest and taxes.
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The stockholder's annual report must include
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all of the above- a balance sheet, an income statement, a statement of retained earnings, a statement of cash flows.
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All of the following are examples of current assets EXCEPT
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accruals.
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The DuPont system merges the income statement and balance sheet into two summary measures of profitability:
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return on total assets and return on equity.
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A firm with a substandard net profit margin can improve its return on total assets by
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increasing its total asset turnover.
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The net value of fixed assets is also called its
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book value.
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_________ ratios are a measure of the speed with which various accounts are converted into sales or cash.
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Activity
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The primary concern of creditors when assessing the strength of a firm is the firm's
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short-term liquidity.
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Retained earnings on the balance sheet represents
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the cumulative total of earning reinvested in the firm.
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The ________ provides a financial summary of the firm's operating results during a specified period.
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income statement
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The analyst should be careful when conducting ratio analysis to ensure that
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all of the above- the same accounting procedures were used, audited statements are used, the dates of the financial statements being compared are the same, the overall performance of the firm is not judged on a single ratio.
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The 2002 Sarbanes-Oxley Act was designed to
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eliminate the many disclosure and conflict of interest problems of corporations.
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The _________ ratio may indicate poor collections procedures or a lax credit policy.
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average collection period
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_______ evidence of the existence of a problem or outstanding management performance is provided by ratio analysis.
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Inconclusive
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Accounting practices and procedures used to prepare financial statements are called
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GAAP.
