FIN301 Exam 1 Part 3

1.

1 point

Minimizing the weighted average cost of capital (WACC) is the primary goal of which decision?

Risk Management Decisions

Capital Budgeting Decisions

Working Capital Decisions

Liquidity Decisions

Capital Structure Decisions

2.

1 point

On the income statement, which of the following line-items represents the amount the company’s employees receive?

Interest expense

Revenue

Cost of goods sold

Taxes

Selling, general, and administrative expenses

3.

1 point

Which of the following is a characteristic of a partnership?

Partnerships are easier to set up than sole proprietorships

It is more difficult for a partnership to raise capital compared to a corporation

Business partnerships are listed on the NYSE

The profits are double taxed

The liability of the owners for the business' claims is limited

4.

1 point

Calculate the company’s Current Assets:
Fixed Assets = $300,000
Long-term debt = $225,000
Current Liabilities = $175,000
Shareholder’s Equity = $150,000

$1,100,000

$250,000

$800,000

$400,000

$375,000

5.

1 point

On the income statement, which of the following line-items represents the amount the company’s creditors receive?

Profit before taxes

Taxes

Interest expense

Cost of goods sold

Selling, general, and administrative expenses

6.

1 point

Given the following information, what is the stock price of the firm?
Market capitalization: $205M
Market Value of Debt: $73M
No. of shares outstanding: 3.5M
Book value of equity: $115M
Net Sales: $340M
P/E Ratio: 8

$58.57

$49.82

$35.14

$25.63

$91.43

7.

1 point

Which of the following is true regarding depreciation methods?

Companies report the same financial results to investors that they report to the Internal Revenue Service

Companies report higher depreciation and lower net income using accelerated depreciation for fixed assets to the Internal Revenue Service

Companies employ straight line depreciation to report higher net income to the Internal Revenue Service

Companies report higher depreciation and net income using straight line depreciation for fixed assets

Using accelerated depreciation methods for fixed assets provides for higher reported net income than straight line depreciation

8.

1 point

According to Traditional Finance, which of the following statements is true?

Prices reflect emotions and biases

Markets are not efficient

Decisions are not always rational and are based on emotions/biases

Arbitrageurs will not correct mispricing in the market

Decisions are based on rational expectations

9.

1 point

Which of the following statements regarding the cash flow statement is true?

Changes in accounts receivables is an investing activity

Investing activities are the main source of a company’s positive cash flow

Changes in cash flow perfectly match with a company’s net income

Depreciation is classified as an operating activity

The disposal or acquisition of plant, property & equipment is classified as an operating activity

10.

1 point

Which of the following statements about shareholders is true?

Shareholders do not agree with Danny Devito’s view (in ‘Other People’s Money’)

Shareholders are protected by contracts

Shareholders are not stakeholders the company

Shareholders are paid before stakeholders

Shareholders are considered owners of the firm

11.

1 point

Which of the following describes the trend in corporate governance from 1980s to present?

Decreasing popularity of hierarchical pay structure, decrease in stock based compensation in order to align management interests with the stockholders

There was more government regulations on audit procedures in the 1980s than there is presently, due to the strong self-regulating abilities of companies

Institutional investors are more active today compared to the 1980s

Hostile takeovers have increased steadily from the 1980s to present due to high-profile activist investors

Today, there’s less emphasis placed on present earnings than future earnings, allowing management more time to show improvements in earnings

12.

1 point

Which one of the following is a Capital Structure decision?

A firm’s decision to fire 20 employees.

A firm’s decision to obtain a 50% debt to equity ratio.

A firm’s decision to expand its product offering.

A firm’s decision to investment in a new employee training program

A firm’s decision to purchase a large piece of machinery.

13.

1 point

Which of the following is true regarding financial statements?

Power, Plant & Equipment (PPE) is found on the income statement

Net profit equals revenues minus cost of goods sold.

Accounts payable is found on cash flow statement

Assets minus Liabilities equals Shareholder Equity

The Cash Flow Statement measures the growth in sales over a period of time

14.

1 point

Which of the following is true regarding income statements?

They report the resources of a company, the obligations of a company, and the equity of the owners over a specific time period

They report the amount of cash and net income generated at one point in time

They report the net assets generated, the net assets consumed, and the net income over a specific time period

They report the net assets generated and consumed, as well as the net income at one point in time

They report the company’s assets, liabilities, and stockholders’ equity over a specific time period

15.

1 point

Given the following information, how many shares are outstanding for this firm?
Market capitalization: $250M
Market Value of Debt: $88M
Gross Profit: $140M
Book value of equity: $93M
Current Ratio: 1.3
Stock Price: $65

6.50M shares

2.69M shares

3.85M shares

4.64M shares

1.07M shares

16.

1 point

Using the following information, calculate the Gross Margin:
Gross Sales: $25,700
Cost of Goods Sold: $12,500
Depreciation: $875
SG&A: $5,200
Tax Expense: $2,850
Interest Expense: $960

51.4%

44.2%

16.3%

27.7%

12.9%

17.

1 point

If investors want to assess how efficient a company is at using its productive resources, they would most likely look at which ratios?

Leverage ratios

Inventory ratios

Profitability ratios

Activity ratios

Liquidity ratios

18.

1 point

Which of the following is a measure of profitability?

Days Payables Outstanding

Current Ratio

Days Sales Outstanding

Fixed Asset Turnover

Operating Margin

19.

1 point

Which of the following is true regarding Café 210 given the following information?
Current Assets = $400
Fixed Assets = $150
Current Liabilities = $200
Long Term Debt = $75
Sales = $240
Net Income = $50

Shareholder Equity = $290

Return on Equity = 18%

Debt to Equity Ratio = 1.33

Asset Turnover = 1.27

Current Ratio = 0.90

20.

1 point

The managerial defense mechanism that occurs when a company is targeted for hostile takeover and responds by selling off its prized assets is

The Pac-Man defense

Crown Jewels

Poison Pill

Golden Parachutes

Greenmail

21.

1 point

Based on the information listed below, which of the following is true regarding the three companies from the same industry?
Company A: P/E=10; ROA=7%
Company B: P/E=29; ROA=9%
Company C: P/E=21; ROA=6%

Investors believe that Company B has the best growth prospects.

Company A is the most efficient when it comes to using assets to generate income.

Company B is the least efficient when it comes to using its assets to generate income.

Company C is the most efficient when it comes to using assets to generate income.

Investors believe that Company C has the best growth prospects.

22.

1 point

Which of the following is a characteristic of a partnership?

The profits are double taxed

Business partnerships are listed on the NYSE

Partnerships are easier to set up than sole proprietorships

The liability of the owners for the business' claims is limited

It is more difficult for a partnership to raise capital compared to a corporation

23.

1 point

Which of the following is a measure of company’s liquidity?

Profit Margin

Return on Assets

Return on Equity

Fixed Assets Turnover

Quick Ratio

24.

1 point

Which of the following statements about stockholders and stakeholders is true?

Stockholders are protected by contracts

Danny Devito (in 'Other People's Money') represents the stakeholder view of the firm

Stockholders have a residual claim on a firm's cash flows

The federal government is never a corporate stakeholder

Stockholders are not stakeholders in a corporation

25.

1 point

Which of the following is true of stakeholders?

The government is not considered a stakeholder

Stakeholders are entitled to a residual claim of the firm’s cash flows

Good management works to maximize the value of the firm to the stakeholders

Stakeholders’ interests are protected by contractual agreements

Danny Devito (in 'Other People's Money') represents the stakeholder view of the firm

26.

1 point

What issues could arise from overemphasizing the Shareholder Value Standard?

Managers try to only hit short-term estimates rather than focus on long-term health of the company

CEOs pay is no longer tied to stock options

Companies do not care about meeting analyst expectations

Shareholders want companies to take on projects with the lowest ROI

There have been fewer financial scandals

27.

1 point

The managerial defense mechanism that occurs when a target company purchases the acquirer’s shares at a premium over the market price is

Crown Jewels

Golden Parachutes

Poison Pill

Greenmail

The Pac-Man defense

28.

1 point

The Matching Principle in GAAP:

Matches sales to inventory shipments

Matches costs of goods sold with the inventory on the balance sheet

Matches revenues with profits on the income statement

Matches ROE to a firm's capital investment

Matches the expenses related to a sale in the same period

29.

1 point

Which of the following is the best indicator of market volatility?

Dow Jones Industrial Average

Price of a barrel of oil

Dollar-to-Euro exchange rate

S&P 500 VIX

30-year Treasury yield

30.

1 point

Which of the following is true regarding balance sheets?

They report the resources and the obligations of a company, as well as the equity of the owners at one point in time

They report the net assets generated and consumed, as well as the net income over a specific time period

They report the resources and the obligations of a company, as well as the equity of the owners over a specific time period

They report the resources and net income of a company at one point in time

They report the amount of cash generated and consumed by a company over a specific time period

31.

1 point

If lenders want to assess the likelihood of borrowers being able to make interest payments, they would most likely look at which ratios?

Activity ratios

Receivables ratios

Liquidity ratios

Profitability ratios

Inventory ratios

32.

1 point

Bernard Madoff told his investors he had $50B in his fund but he really only had $15B. Why?

He paid out higher returns than he earned

He lost money investing in International Reply Coupons (IRCs)

He was fined by the SEC for audit infractions

He spent a fortune on commercials to attract new investors

Interest rates skyrocketed, which decreased the value of his stocks

33.

1 point

Which of the following constituencies are activist investors seeking to benefit?

Employees

Other Corporations

Management

Shareholders

Government Agencies

34.

1 point

Which of the following is true regarding Zeno’s given the following information?
Current Assets = $200
Fixed Assets = $310
Current Liabilities = $190
Long Term Debt = $140
Revenue = $450
Net Income = $90

Asset Turnover = 1.20

Debt to Equity Ratio = 0.78

Shareholder Equity = $100

Return on Equity = 75%

Current Ratio = 1.65

35.

1 point

According to Behavioral Finance, which of the following statements is true?

Prices reflect emotions and biases

Prices reflect values

Low risk equals high returns

Decisions are based on rational expectations

Markets are always efficient

36.

1 point

On a common size balance sheet, each item is expressed as a percentage of what value?

Inventory

Net Sales

Cash

Liabilities + Stockholders Equity

Power, Plant and Equipment (PP&E)

37.

1 point

On the income statement, which of the following line-items represents the amount the company’s creditors receive?

Profit before taxes

Selling, general, and administrative expenses

Interest expense

Taxes

Cost of goods sold

38.

1 point

Which of the following is true about the Rest of the World model of corporate governance?

The majority owner manages the company.

Customer satisfaction is not a goal for companies.

Government is never involved in management issues.

Equity is not publicly sold.

The Board of Directors represents shareholders’ interests.

39.

1 point

Which of the following is true regarding financial statements?

Gross profit equals sales minus cost of goods sold.

The Balance Sheet measures the growth in revenues over a period of time.

Shareholders' equity is found on the income statement

Accounts receivable is found on cash flow statement

Assets divided by Liabilities equals Shareholder Equity

40.

1 point

Shareholders’ equity on the balance sheet is equal to which of the following?

The market value of company’s shares in the market

The total assets of a company

Previous issued common stock plus retained earnings

The assets plus the liabilities of a company

The market value of the company’s issued bonds and common stock

41.

1 point

Calculate the Return on Equity (ROE) using the Strategic Profit Model for a company with the following data:
Profit margin = 8%
Total Asset Turnover = 1.5
Inventory Turnover = 2.4
Equity Multiplier = 1.6
Current Ratio = 0.9

19%

23%

9%

41%

7%

42.

1 point

According to the Revenue Recognition Principle in GAAP:

Dividends can be paid only after taxable income is positive

Expenses can be realized when cash payment is made

Companies can realize revenue only if the transaction is profitable

Revenue is recognized when a good or service is provided, not when the money is received

Companies can realize certain gains on their operating books, while omitting them from their tax books

43.

1 point

Given the following information, which company is the most liquid?
Wells Dakota: Current Ratio = 2.8; Asset Turnover = 1.6; Debt/Equity Ratio = 1.2
CNP Bank: Current Ratio = 2.3; Asset Turnover = 2.3; Debt/Equity Ratio = 1.7
MetroBank: Current Ratio = 0.7; Asset Turnover = 3.2; Debt/Equity Ratio = 2.0
PJWebb Chase: Current Ratio = 1.3; Asset Turnover = 0.4; Debt/Equity Ratio = 0.8
Bank of the States: Current Ratio = 1.6; Asset Turnover = 3.4; Debt/Equity Ratio = 2.9

CNP Bank

Wells Dakota

MetroBank

PJWebb Chase

Bank of the States

44.

1 point

The quarterly report publicly traded companies must file with the SEC is the

8K

401K

10K

10Q

4C

45.

1 point

Which of the following correctly describes the revenue recognition policy under US GAAP?

GAAP does not provide any guidance on revenue recognition.

Revenue is recognized when a company receives payment for a good or service.

Revenue is recognized only when payment has been received for a good or service.

Revenue is recognized when a company has manufactured the product.

Revenue is recognized when a good or service has been provided.

46.

1 point

A proxy fight is where:

Employees strike against management due to low wages

One tries to take control of a corporate board by making shareholders vote for his/her board members

Management fires employees for poor performance

A hedge funds substitutes equity for debt

An individual bids against institutional investors for shares in a company

47.

1 point

Given the following information, calculate the company’s Net Cash Flows for 2012. Assume no taxes.
Year 2012 Summary:
Net income = $630 million
Depreciation = $80 million
Sale of plant = $100 million
Issuance of new shares = $220 million

$1,030 million

$160 million

$680 million

$240 million

$430 million

48.

1 point

Calculate the company’s Current Liabilities:
Fixed Assets = $450,000
Current Assets = $400,000
Long-term debt = $250,000
Shareholder’s equity = $275,000

$260,000

$625,000

$450,000

$1,275,000

$325,000

49.

1 point

Why did Bernard Madoff’s Ponzi scheme fall apart?

His auditor turned him in

Too many new investors wanted him to manage their portfolios

He lacked the name recognition to attract investors

There was a financial crisis and too many investors withdrew their money There was a financial crisis and too many investors withdrew their money

The SEC investigation revealed his scheme

50.

1 point

What are some challenges to the Shareholder Value Standard?

Capital markets not reliant enough on technology

Too little focus on markets and expectations

CEO compensation too heavily tied to stock price

Management looks only at the long-term horizon

A decline in financial scandals, which makes the SEC irrelevant