A few practice questions from chapters 1-5

Go over the problems below, provide an answer, bring your questions to class. Correct answers in bold.

1. The mixture of debt and equity by the firm to finance its operations is called:
a) Working capital management.
b) Financial depreciation.
c) Agency cost analysis
d) Capital structure.

2. The management of the firm’s short-term assets and liabilities is called:

a) Working capital management.
b) Financial depreciation.
c) Agency cost analysis.
d) Capital budgeting.
e) Capital structure.

3. The possibility of conflict of interest between the stockholders and management of the firm is
called:
a) The shareholder’s conundrum.
b) Corporate breakdown.
c) The agency problem.
d) Corporate activism.
e) Legal liability.

4. Which of the following help ensure managers act in the best interest of owners?
I. A compensation package for managers that ties their salary to the firm’s share price.
II. Managers are promoted only if the firm prospers.
III. The threat that if the firm does poorly, shareholders will use a proxy to fight to replace the
existing management.
IV. There is a high degree of likelihood the firm will become a takeover candidate if the firm does
poorly.

a) I and II only
b) II and III only
c) I, III, and IV only
d) I, II, III, and IV
e) I, II, III, and IV

5. Which of the following is a true 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 limited liability for business debts.
d) When dividends are paid, corporate profits are taxed once.
e) It is difficult to transfer ownership of corporate shares.
6. Which of the following would be considered a primary market transaction?
a) A buy order to an investment banker for a new public stock offering.
b) A buy order to a broker for shares of a company on NYSE.
c) A buy order to a broker for shares of a company on AMEX.
d) A buy order to a dealer for shares of a company on OTC.
e) A buy order for a stock listed on a regional exchange.

7. The financial statement showing a firm’s accounting value on a particular date is the:
a) Income statement.
b) Balance sheet.
c) Statement of cash flows.
d) Tax reconciliation statement.
e) Shareholder’s equity sheet.

8. The financial statement summarizing a firm’s performance over a period of time is the:
a) Income Statement.
b) Balance sheet.
c) Statement of cash flows.
d) Tax reconciliation statement.
e) Shareholder’s equity sheet.

9. ___________ refers to the difference between a firm’s current assets and its current liabilities.
a) Operating cash flow.
b) Capital spending.
c) Net working capital.
d) Cash flow from assets.
e) Cash from to creditors.

10. If current assets = $95, net fixed assets = $250, long-term debt = $40, and the owner’s equity =
$200, what is the value of current liabilities if it is the only other item on the balance sheet?
a) -$50
b) $50
c) $105
d) $145
e) $545

Use the following to answer question 11:

Taxable income Tax rate

$ 0 - $ 50,000 15 %
$ 50,001 - $ 75,000` 25%
$ 75,001 - $ 100,000 34%
$ 100,001 - $ 335,000 39%

11. Celeste Video, Inc. reports 2000 taxable income of $200,000. How large is this firm’s tax bill?
a) $48,750
b) $61,250
c) $67,000
d) $78,000
e) $91,125
12. The current ratio is measured as:
a) Current assets minus current liabilities.
 b) Current assets divided by current liabilities.
c) Current liabilities minus inventory, divided by current liabilities.
d) Cash on hand divided by current liabilities.
e) Current liabilities divided by current assets.

13. Which of the following is a correct interpretation of a profit margin of 0.20?

a) For each $1 of sales the firm earns twenty cents of income.
b) For each $1 of sales the firm earns twenty cents before operating expenses
c) For each $1 of sales, $2 falls to the bottom line.
d) It takes sales of $1 to generate $20 in net profit after taxes.
e) It takes twenty cents in sales to generate $1 in profit.

14. A firm with income of $500,000 pays 48% of net income out in dividends. If the firm has 150,000
shares of common stock outstanding, what is he dividend paid per share of stock?
a) $0.30
b) $1.44
c) $1.60
d) $1.73
e) $3.33

15. Computronics, Inc. has a current ratio of 1.5. This implies that if the firm liquidates its current
assets in order to pay off its current liabilities, it can sell the current assets for as little as:
a) 15% of book value.
b) 25% of book value.
c) 33% of book value.
d) 67% of book value.
e) 150% of book value.

16. A firm has sales of $500, total assets of $300, and a debt/equity ratio of 2. If its return on equity is
15%, what is its net income?
a) $7.50
b) $15.00
c) $22.50
d) $32.50
e) $50.00

17. Interest earned on both the initial principal and the interest reinvested from prior periods is called
________.
a) Growth.
b) Annual interest.
c) Simple interest.
d) Interest on interest.
e) Compound interest.
18 The process of finding the present value of some future amount is often called _________.
a) Growth
b) Discounting
c) Accumulation
d) Compounding
e) Reduction

19. You received a $1 savings account earning 5% on your 1st birthday. How much will you have in
the account on your 40th birthday if you do not withdraw any money before then?
a) $5.89
b) $6.34
c) $6.70
d) $7.00
e) $7.04

20. Your grandfather placed $2,000 in a trust fund for you. In 10 years the fund will be worth $5,000.
What is the rate of return on the trust fund?
a) 5.98%
b) 8.76%
c) 9.60%
d) 9.98%
e) 10.14%

21. You need $2,000 to buy a new stereo for your car. If you have $800 to invest at 5% compounded
annually, how long will you have to buy the stereo?
a) 6.58 years.
b) 8.42 years.
c) 14.58 years.
d) 15.75 years.
e) 18.78 years.

22. Granny puts $35,000 into a bank account earning 4%. You can’t withdraw the money until the
balance has doubled. How long will you have to leave the money in the account?
a) 16 years
b) 17 years
c) 18 years
d) 19 years
e) 20 years

23. Andy promises Opie that he will give him $5,000 upon graduation from college at Mayberry U.
How much must Andy invest today to make good on his promise, if Opie is expected to
graduate in 12 years and Andy can earn 5% on his money?
a) $2,135.32
b) $2,784.19
c) $2,881.11
d) $3,012.88
e) $8,979.28