FIN 3414 Exam 1

Sole proprietorships

create unlimited liability for their owners

According to the textbook, the decisions made by financial managers should focus on increasing the

market value of the existing owners' equity.

Net working capital is best defined as

current assets minus current liabilities.

The rules by which corporations govern themselves are called

bylaws

Which one of the following terms refers to a conflict of interest between the stockholders and managers of a corporation?

Agency problem

Which one of the following parties is generally not considered to be a stakeholder of a firm?

A business located next door to the firm

Which type of business organization has all the respective rights and privileges of a legal person?

Corporation

Since the implementation of the Sarbanes-Oxley Act, the cost of corporate audits in the United States

initially increased substantially, but over time has been decreasing

Issuing new shares of equity results in a cash flow from _____________ to _____________

the financial markets; the firm

The Securities Act of 1933 focuses on

the issuance of new securities.

A business entity formed by two or more individuals who each have unlimited liability for the debts of the business is called a

general partnership

A store receives cash when a customer

pays their invoice from the store with cash

Which one of the following is an advantage of a general partnership relative to a regular C-corporation?

Profits are taxed as individual income only

Which one of the following is a capital budgeting decision?

Deciding whether to build a new distribution center

Both the treasurer and the controller of a corporation generally report to the

chief financial officer

A change in which one of the following accounts is treated as a cash flow from operating activities in an accounting statement of cash flows?

Inventory

The _____________tax rate equals the total taxes a taxpayer must pay, divided by their total taxable income.

average

_____________refers to the changes in net fixed assets

Cash flow from investing activities

When financial managers consider the value of an asset, they are normally concerned with

the market value of the asset.

The cash flow of a firm, also referred to as cash flow from assets, must be equal to the cash flow to

equity holders plus the cash flow to debt holders

The long-term debts of a firm are liabilities

that do not come due for at least 12 months.

Free cash flow is

cash that is available to distribute to creditors and equity holders.

Which one of the following statements concerning liquidity is correct?

Balance sheet accounts are listed in order of decreasing liquidity.

Which one of the following items is handled differently in calculating cash flows for accounting purposes versus financial purposes?

Interest expense

What is the formula for computing operating cash flow?

EBIT + Depreciation − Current taxes

All other things being equal, which of the following actions will increase the value of stockholders' equity?

An increase in property, plant and equipment

Which of the following actions will increase earnings per share?

Decreasing the cost per unit of inventory sold

Capital spending refers to

the net purchases and sales of fixed assets.

Of the following accounts, which one is generally the most liquid?

Accounts receivable

Which one of the following expenditures is both a product cost and a fixed cost in the short run?

Monthly lease payment for production equipment

EBITDA is the abbreviation for earnings before

interest, taxes, depreciation, and amortization.

Which one of the following statements is correct concerning ratio analysis?

A single ratio is often computed differently by different firms.

Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are often referred to as

liquidity measures.

The internal rate of growth is based on the assumption that

no external funding of any type is obtained.

If the stockholders of a firm want to know how much net profit the firm is making as a percentage of their investment in that firm, the shareholders should calculate the

return on equity.

A firm’s total asset turnover measure of .42 means that a firm has $.42 in

sales for every $1 in total assets.

All of the following are financial leverage ratios except the

current ratio

Ratio analysis works best when evaluating the financial statements of two firms

of differing sizes in the same industry

On a common-size income statement, depreciation will be

expressed as a percentage of sales

A common-size income statement expresses costs of goods sold expense as 23 percent. This means that the expense represents 23 percent of

sales

Firms with high enterprise value multiples are most apt to have

high growth opportunities

The sustainable rate of growth can be increased by

increasing the profit margin

Which of the following represent problems encountered when comparing the financial statements of one firm with those of another firm?

1. I. The firms may have unrelated lines of business.

2. II. The operations of the two firms may vary geographically.

3. III. The firms may use differing accounting methods.

4. III. The two firms may be regulated differently.

I, II, III, and IV

Which portion of the DuPont identity measures the financial leverage employed by a firm?

Equity multiplier

Which ratio calculates the amount of sales generated by each $1 of debt and equity invested in the firm?

Total asset turnover

Which type(s) of loan pay(s) interest as an annuity and the principal as a lump sum?

Interest-only loans

An annuity pays its first payment at the end of Year 5. When you initially compute the present value of this annuity, the computed value will be as of the end of Year

4

Which term applies to a set of cash flows that are finite in number and increase in amount at a steady rate?

Growing annuity

The selection of an appropriate discount rate for a particular project is primarily dependent upon the project's

level of risk

In which type of loan does the borrower initially receive the present value of the future lump sum loan repayment amount?

Pure discount loan

The highest effective annual rate that can be derived from an annual percentage rate of 7 percent is computed as

e^0.07 - 1

Discounting cash flows involves

adjusting all expected future cash flows to their current value

Which type(s) of loan can be repaid with annuity payments?

Amortized loan

By federal law, lenders must disclose

the APR, including fees and other noninterest charges

You plan to make a one-time deposit today, and want it to increase in value to $100 at the end of this year. Which rate of interest will allow you achieve your goal by depositing the least amount today?

5.6%

Given a firm with positive annual cash flows, which one of the following actions will increase the current value of that firm?

Increasing the annual growth rate of the cash flows

The growing perpetuity present value formula assumes that

g < r and the time periods are regular and discrete

Which one of the following statements related to the time value of money is correct? Assume a positive rate of interest.

A dollar received today is more valuable than a dollar received next month

Given a positive rate of return and multiple time periods, compound interest

increases in an exponential manner

An investor started saving for retirement today and plans to make annual contributions into her retirement account. Which one of the following actions will have the greatest positive impact on the total amount in her retirement account as of the day she retires? Assume she earns a positive rate of return each year.

Delaying her retirement by one year