Quiz_1_Chapters_1_3_Answers_LionelAmayi

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FIN3000 Principles of Finance Quiz 1 Dr. Borg Write T for true or F for false next to each number. Circle the best answer for multiple-choice questions 1. The financial manager must execute his or her duties independent of the other activities of the firm in order to properly maximize the value of the firm. F 2. Two key limitations of the proprietorship form of business involve the presence of unlimited personal liability for business debts and ease of raising capital? T 3. The balance sheet is a financial statement measuring the flow of funds into and out of various accounts over time while the income statement measures the progress of the firm at a point in time. F 4. The proper goal of the financial manager should be to maximize the firm's expected profit, because this will add the most wealth to each of the individual shareholders of the firm. F 5. Normal profits are those that result in rates of return that are just enough to attract new capital in financial markets. T 6. Ratio analysis involves a comparison of the relationships between financial statement accounts so as to analyze the financial position and strength of a firm. T 7. In a competitive marketplace there are simply too few benefits to be gained from maintaining high business ethics. F 8. Exchange rate risk is the risk that the cash flows from a foreign project will be worth less than those same cash flows denominated in the parent company's home currency. T 9. The financial position of companies whose business is seasonal can be dramatically different depending upon the time of year chosen to construct financial statements. This time sensitivity is especially true with respect to the firm's balance sheet. T 10. Having the manager's compensation tied to the company's performance increases the agency problem that corporations face. F 11. If the current ratio of Firm A is greater than the current ratio of Firm B, we cannot be sure that the quick ratio of Firm A is greater than that of Firm B. However, if the quick ratio of Firm A exceeds that of Firm B, we can be assured that Firm A's current ratio also exceeds B's current ratio. F 12. The OTC market is a physical exchange, much like the New York Stock Exchange, where securities dealers provide trading in unlisted securities. F 13. Selling new stock is an equity transaction; it does not affect any asset or liability account and therefore, does not appear on the statement of cash flows. F 14. One advantage of using common stock as a source of funds is that common stock does not legally obligate the firm to make payments to stockholders. T

15. Under a best-efforts arrangement, the investment bank purchases all of the shares from the firm and then resells the shares to the public. F 16. A decline in the inventory turnover ratio suggests that the firm’s liquidity position is improving. F 17. A statement reporting the firm’s operating, investing, and financing activities on cash flows over an accounting is the statement of cash flows. T 18. When a firm conducts a stock repurchase, it increases an equity account which is an example of a source of funds. F 19. The balance sheet presents a summary of the firm’s revenues and expenses over an accounting period. F Multiple Choice: Circle letter to best answer. 20. The primary goal of a publicly owned firm interested in serving its stockholders should be to a. Minimize the debt used by a firm. b. Maximize expected EPS. c. Minimize the chances of losses. d. Maximize the stock price per share. e. Maximize expected net income. 21. Which of the following is a reason why companies move into international operations? a. To take advantage of lower production costs in regions of inexpensive labor. b. To develop new markets for their finished products. c. To better serve their primary customers. d. Because important raw materials are located abroad. e. All of the above. 22. Which of the following should be the primary goal pursued by the financial manager of a firm? a. Maximize net income (profits). b. Maximize the firm's net worth, or book value.

c. Maximize dividends paid to common stockholders. d. Minimize variable operating expenses. e. Maximize the market value of the firm's stock. 23. Which of the following is an example of an area of business where use of "questionable" ethics is considered a necessity? a. Attracting and sustaining new customers. b. Hiring and keeping skilled employees. c. Keeping up with competition. d. Dealing with firms who use "questionable" ethics. e. None of the above. 24. Yesterday, Bicksler Corporation purchased (and received) raw materials on credit from its supplier. All else equal, if Bicksler’s current ratio was 2.0 before the purchase, what effect did this transaction have on Bicksler’s current ratio? a. Increased b. Decreased c. stayed the same d. There is not enough information to answer this question. e. None of the above is a correct answer. 25. Which of the following statements is correct? a. A major disadvantage of a regular partnership or a corporation as a form of business is the fact that they do not offer their owners limited liability, whereas proprietorships do. b. An advantage of the corporate form for many businesses is the fact the corporate tax rate always exceeds the personal tax rate, which is the rate at which proprietorships and partnerships are taxed. c. There are more partnerships and sole proprietorships than corporations in the U.S., but corporations produce more goods and services than do other forms of business. d. Because corporations enjoy the benefits of limited liability, easy transferability of ownership interest, unlimited life, and favorable tax status relative to the situation for partnerships and proprietorships, most large businesses choose to incorporate. e. Because lawyers have the incorporation process so, it is less expensive to form a corporation than to form a proprietorship or partnership.

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26. All of the following are external factors that influence the stock prices of the firm except a. legal constraints b. capital structure c. tax laws d. general level of economic activity e. conditions in the stock market 27. An analysis of a firm’s financial ratios over time that is used to determine the improvement or deterioration in its financial situation is called a. sensitivity analysis b. DuPont chart c. ratio analysis d. progress chart e. trend analysis 28. As a short-term creditor concerned with a company's ability to meet its financial obligation to you, which one of the following combinations of ratios would you most likely prefer? Current Debt ratio TIE ratio a. 0.5 0.5 0.33 b. 1.0 1.0 0.50 c. 1.5 1.5 0.50 d. 2.0 1.0 0.67 e. 2.5 0.5 0.71 29. All other things constant, an increase in a firm’s profit margin would a. increase the additional funds needed for financing a growth in operations. b. decrease the additional funds needed for financing a growth in operations. c. have no effect on the additional funds needed for financing a growth in operations. d. decrease its taxes. e. none of the above. 30. If Boyd Corporation has sales of $2 million per year (all credit) and days sales outstanding of 35 days, what is its average amount of accounts receivable outstanding (assume a 360 day year)? a. $194,444 b. $57,143

c. $5,556 d. $97,222 e. $285,714 31. A firm has a profit margin of 15 percent on sales of $20,000,000. If the firm has debt of $7,500,000, total assets of $22,500,000, and an after-tax interest cost on total debt of 5 percent, what is the firm's ROA? a. 8.4% b. 10.9% c. 12.0% d. 13.3% e. 15.1% 32. Alumbat Corporation has $800,000 of debt outstanding, and it pays an interest rate of 10 percent annually on its bank loan. Alumbat's annual sales are $3,200,000; its average tax rate is 40 percent; and its net profit margin on sales is 6 percent. If the company does not maintain a TIE ratio of at least 4 times, its bank will refuse to renew its loan, and bankruptcy will result. What is Alumbat's current TIE ratio? a. 2.4 b. 3.4 c. 3.6 d. 4.0 e. 5.0 33. The Meryl Corporation's common stock currently is selling at $100 per share, which represents a P/E ratio of 10. If the firm has 100 shares of common stock outstanding, a return on equity of 20 percent, and a debt ratio of 60 percent, what is its return on total assets (ROA)? a. 8.0% b. 10.0% c. 12.0% d. 16.7% e. 20.0% 34. You are given the following information about a firm: The growth rate equals 8 percent; return on assets (ROA) is 10 percent; the debt ratio is 20 percent; and the stock is selling at $36. What is the return on equity (ROE)? a. 14.0% b. 12.5% c. 15.0%

d. 2.5% e. 13.5% Use the following financial statements information to answer problems 35 – 38: \

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35. Calculate the Return on Assets (ROA) a. 18.6% b. 19.22% c. 19.93% d. 22.77% 36. Calculate the Return on Equity (ROE) a. 15.27% b. 27.06% c. 21.21% d. 17.78% 37. Calculate the Net Profit Margin a. 5.15% b. 4.25% c. 9.22% d. 4.60% 38. Calculate the Debt Ratio a. 15.84% b. 16.02% c. 16.83% d. 17.27%

39. Which of the following ratios measures how effectively a firm is managing its assets? a. quick ratio b. times interest earned c. profit margin d. inventory turnover ratio e. price earnings ratio

40. What is the common challenge in the world of finance? a. It generally operates with a high degree of uncertainty b. It causes investor anxiety due to a volatile stock market c. It is difficult to abide bt generally accepted accounting principles (GAAP) d. It must comply with banking regulations that are subject to change 41. Which situation is unethical? a. The investment manager publishes false investment performance reports in hopes of attracting new investors. b. The hiring manager of a company suggests that his uncle should buy the company stock after the company financial information is made public. c. A high-ranking director sells shares of his own company stock to fund family medical expense d A corporate executive asks her aunt to review her most recent tax return 42. When do business owners and managers use financial statements? a. When deciding to make or purchase certain materials b. When setting the current market price of company common stock c. When deciding to use retained earnings as a cash account d. When deciding whether to sell uncollectable short-term liabilities 43. Which financial method allows external users to determine the net worth of a business? a. Measuring cost of capital b. Comparing cash flows c. Calculating financial ratios d. Analyzing financial statements 44. A company has sales of $132 million, net income of $24 million, a total asset turnover of 0.84, and a leverage multiplier of 1.6. What is the company\s return of equity, using the DuPont formula? a. 15.41% b. 16.79% c. 18.18% d. 24.43%

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45. A company has sales of $56 million, net income of $19 million, a total asset turnover of 0.98, and a leverage multiplier of 1.2. What is the company\s return of equity, using the DuPont formula? a. 19.80% b. 32.50% c. 39.90% d. 41.20% 46. What does retained earnings on a balance sheet represent? a. The total of firm earnings that have been reinvested in the firm b. The cash reserve account to be used iu emergency situations c. The cash reserve account to be used when liquidating the company d. The total of firm revenues that have been reinvested in the firm 47. Large, well-known public companies can reduce the time required to register and issue securities by using a(n) a. Shelf registration. b. Subchapter S registration. c. Underwriting syndicate. d. Secondary market registration. e. "Red herring" registration.

48. If you wanted to purchase previously issued shares of stock from another investor you would find the shares in the a. primary market. b. debt market. c. IPO market. d. secondary market. e. SEO market. 49. The process of converting an exchange from a mutual ownership structure to a stock owned is known as what? a. Privatization b. Diversification c. Demutualization d. Industrialization 50. Five areas that financial ratios concentrate on are: a) liquidity, profitability, debt, efficiency, market related; b) profitability, strategy, liquidity, auditing, share prices; c) liquidity, current ratio, quick ratio, interest cover, dividend cover; d) market related, share prices, dividend policy, debt policy, strategy; e) none of the above.

Quiz_1_Chapters_1_3_Answers_LionelAmayi

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