Principles of Finance Ch 1-3 Test

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

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