Fin 6710 Homework Assignment # 1 September 7, 2010

Multiple Choice

1. __________ activities allow corporations to raise capital by selling stock to investors.

a. NYSE
b. Secondary market
c. Primary market
d. Money market
e. Centralized Nasdaq
2. Jane purchased Ford shares for $30. Later, she sold them in the secondary market for $40. Who received
the profits from this sale?
a. Jane
b. the exchange on which Ford shares are traded
c. the investor who purchased the shares at $40
d. no new cash flow was generated, so there was no profit
e. Ford
3. Which of the following would not interest a firm seeking longer-term financing?
a. issuing corporate bonds
b. borrowing from a commercial bank
c. issuing notes
d. issuing commercial paper
e. none of the above
4. Which of the following would be considered an advantage of the sole proprietorship form of business
organization?
a. unlimited life
b. pooled expertise
c. wide access to capital
d. unlimited personal liability
e. income taxed at only one level
5. Double taxation:
a. occurs when governments tax profits at the corporate level and dividends at the
personal level.
b. is the single greatest advantage of the corporate form of business.
c. can mean savings in taxes if a given business activity is conducted through a corporation
rather than through a partnership.
d. only occurs in corporations that have preferred stock outstanding.
e. none of the above
6. Which of the following statements is false?
a. The objective of profit maximization typically translates into maximizing earnings per
share.
b. Profit maximization adequately deals with timing and risk.
c. Profit maximization is not the proper objective for managers.
d. Financial managers should not necessarily select projects with the highest expected
monetary return.
e. none of the above
 7. The primary goal of a publicly-owned corporation should be to:
a. maximize total corporate revenue
b. maximize the price per share
c. minimize the chance of losses
d. maximize earnings per share
e. none of the above
8. Which of these groups would not be considered "stakeholders" of the firm?
a. suppliers
b. customers
c. shareholders
d. employees
e. all of the above are considered “stakeholders”
9. Shareholders can attempt to overcome managerial agency problems by:
a. incurring monitoring expenditures
b. relying on market discipline such as hostile takeovers
c. using specialized compensation contracts
d. incurring bonding costs
e. all of the above
10. Being legally organized as a __________ offers clear competitive advantages over other organizational
forms.
a. partnership
b. private company
c. public corporation
d. multinational consortium
e. sole proprietor
11. Which of the following is a basic function of corporate finance?
a. risk management
b. corporate governance
c. capital budgeting
d. financial management
e. all of the above
12. The __________ function focuses on raising capital to support a company's operations and investment
programs.
a. financing
b. capital budget
c. financial management
d. corporate governance
e. risk-management
13. U.S. and non-U.S. companies raise the bulk of the funding they require each year through __________.
a. selling equity
b. selling debt
c. internal funding
d. external funding
e. venture capitalists
14. The __________ function is arguably the single most important activity of the firm's financial manager.
a. financing
b. capital budgeting
c. financial management
d. corporate governance
e. risk-management
15. Which of the following statements regarding financial markets and securities is the most accurate?
a. Debt represents an ownership interest in the firm.
b. Trades of securities in the secondary market raise additional funds for corporations.
c. Trades in the primary market are between issuing corporations and investors.
d. More stock than bond transactions occur in the primary market.
e. U.S. security issuers account for only a small portion of worldwide issues.
16. The market for debt instruments maturing in one year or less is the:
a. short-term debt market
b. money market
c. capital market
d. primary market
e. interest market
17. With which form of business organization do all owners enjoy limited liability?
a. Sole Proprietorship
b. Partnership
c. Corporation
d. Limited Partnership
e. Venture Capitalist
18. Incentive compensation plans are designed to:
a. motivate managers to do what is in the best interest of shareholders.
b. overcome agency costs.
c. tie management compensation to the stock price.
d. typically give managers the right to purchase stock at a fixed price, usually the current
market price at the time the right is granted.
e. all of the above.
19. A risk averse manager would
a. Take on projects that maximize shareholder wealth
b. Consistently accept projects that are above the firm’s level of risk
c. Consistently accept projects that are well below the firm’s desired risk
d. Only take risky projects
20. Which of the following activities would be considered the risk management?
a. Purchasing derivative instruments such as forwards, futures, options, and swaps
b. Matching the maturities of assets and liabilities
c. Locating production plants in the same country as the firm’s customers
d. All of the above could be risk management
21. Which of the following would may a firm ineligible for S Corporation status?

a. The firm has 55 shareholders

b. All the shareholders are people (as opposed to other corporations)
c. The firm is a French corporation
d. The firm plans to eventually go public
22. Large publicly-traded corporations are exposed to agency costs because
a. The separation of ownership and control of the corporation
b. The board of directors has outside members
c. The high compensation of CEOs
d. None of the above
23. The double taxation problem refers to:

a. The problem of different tax rates on capital gains and ordinary income.
b. The problem of higher tax rates for shareholders relative to partners.
c. The problem of income from foreign customers taxed both in the foreign market and then
again as income in the US market.
d. The problem of state and federal income taxes for corporations.
24. Professional-service firms (such as doctors or dentists) are likely set up as:

a. Corporations, to gain limited liability

b. Partnerships, to gain tax advantages
c. S corporations, to gain easy valuation
d. Limited liability companies, to gain tax and liability benefits
25. A company's balance sheet shows the value of assets, liabilities, and stockholders' equity:
a. at the end of the fiscal year
b. for any given period of time
c. at a specific point in time
d. over an annual period
e. at the end of the calendar year
26. On a balance sheet, retained earnings are not "unspent cash" because:
a. they have been paid out to common stockholders
b. they have an arbitrarily assigned value
c. they are always changing
d. they have been used to finance the firm's assets
e. they are an estimate of future inflows
27. For both managers and external financial analysts, __________ is the single most important accounting
number found on the income statement.
a. net income (net profit after tax)
b. earnings before interest and taxes (EBIT)
c. earnings available for common stockholders
d. operating profit
e. gross margin
28. Earnings per share (EPS) is calculated by:
a. dividing pretax income by the number of shares of common stock outstanding
b. dividing the dividends paid by the number of shares of common stock outstanding
c. dividing earnings available for common stockholders by the number of shares of common
stock outstanding
d. dividing net profits after tax by the total number of preferred and common stock shares
outstanding
e. none of the above
29. Pennywise, Inc. had a great year. Sales reached an all-time high of $25 million, with a gross margin of
$7.5 million. Depreciation was recorded at $800000. Earnings before interest and taxes were $3 million,
interest was $1.5 million, and total taxes were $700000. The firm's operating cash flow (OCF) was:
a. $3400000
b. $950000
c. $3100000
d. $2150000
e. $7100000
30. In May, GoGreen, Inc. increased its inventory of home composting kits, expecting sales to spike with
warmer weather. This decision resulted in __________ for the firm.
a. a decrease in depreciation expense
b. an increase in depreciation expense
c. an inflow of cash
d. an outflow of cash
e. a decrease in earnings
31. While examining her firm's Statement of Cash Flows, Amy discovered an unusually large increase in
accounts receivable. This might occur if:
a. the firm was holding more inventory
b. the firm had softened its credit requirements
c. sales had increased significantly
d. a & b
e. b & c
32. Net working capital:
a. is a measure of a firm's overall liquidity
b. is defined as total assets minus current liabilities
c. reflects decreasing firm solvency as it increases
d. all of the above
e. none of the above
33. When evaluating financial ratios, analysts typically examine a firm's ratio values:
a. compared to firms in other industries
b. compared to the firm's previous years' ratios
c. compared to regional averages
d. compared to firms with similar net profit margins
e. all of the above
34. Why is the quick ratio a more appropriate measure of liquidity than the current ratio for a large-airplane
manufacturer?
a. It recognizes the contribution of all assets so that analysts can see how "quickly" a firm
can satisfy its short-term obligations.
b. It recognizes that parts can be quickly converted to cash.
c. It provides a better measure of overall liquidity when a firm has highly liquid inventory.
d. It is not more appropriate. The current ratio would provide better information in this
situation.
e. It excludes inventory from the numerator of the ratio because it is difficult to convert
inventory to cash and most sales are made on a credit basis.
35. __________ ratios would provide the best information regarding total return to common stockholders.
a. Profitability
b. Activity
c. Liquidity
d. Market
e. Debt
36. Jane's Foods, Inc., a retail grocery chain, has an inventory turnover ratio of 18.7. The industry average is
16.8. The difference in these ratios shows that Jane's Foods, Inc.:
a. carries larger inventories than the industry average.
b. has lower sales than the average firm in the industry.
c. sells its goods at a slower rate than the industry average.
d. sells its goods more quickly than the industry average.
e. invests more in inventory per dollar of sales than the industry average.
37. The one fixed asset that is not depreciated is __________.
a. cash
b. inventories
c. plant
d. land
e. equipment
38. A __________ expresses all income statement entries as a percentage of sales.
a. ratio income statement
b. statement of retained earnings
c. common-size income statement
d. common-size balance sheet
e. cash flow analysis
39. Noncash charges, such as __________, are expenses that appear on the income statement but do not
involve an actual outlay of cash.
a. investment flows, operating flows, financing flows
b. NOPAT
c. free cash flows
d. depreciation, amortization, and depletion allowance
e. All of the above

40. The firm's managers use ratios to __________.

 a. generate an overall picture of the company's financial health
b. monitor the firms' performance from period to period
c. isolate developing problems
d. monitor all aspects of the firm's financial situation
e. all of the above
41. Return on total assets (ROA) is equal to __________.
a. net profit margin  total asset turnover
b. [earnings available for common stockholders / sales]  [sales / total assets]
c. earnings available for common stockholders / total assets
d. the product of the components of the DuPont System
e. all of the above
42. When a firm has no "other income," its operating profit and __________ are equal.
a. net income
b. net profit after taxes
c. EPS
d. EBIT
e. EAT
43. The __________ flows result from debt and equity financing transactions.
a. financing
b. operating
c. investment
d. cash
e. free cash
44. The firm's __________ are primarily interested in ratios that measure the short-term liquidity of the
company and its ability to make principal and interest payments.
a. board of directors
b. creditors
c. owners
d. financial managers
e. customers
45. A firm changes from LIFO to FIFO; this change will be found in the
a. The balance sheet
b. The income statement
c. The statement of cash flows
d. Notes to the financial statements
46. In 2011, a firm books the following: increase in cash, $0; increase in inventories $24; increase in
accounts receivable, $27; increase in accounts payable, $10; what is the firms change in net working
capital?
a. $0
b. -$41
c. $41
d. $51
47. A manager has a choice of depreciation methods, 5 year straight line or 5 year MACRS; which is the most
likely choice, and why?
a. MACRS to decrease taxes
b. Straight line to minimize depreciation expense
c. Straight line to match financial accounting records
d. Both choices are simply accounting choices with no real economic impact
48. Which of the following is an inflow of corporate cash?
a. Dividends
b. Increasing treasury stock
c. Purchasing treasury bills
d. Depreciation charges
.