Principles of Finance

Exam 1 Q1. There is no legal distinction made between the assets of the business and the personal assets of any of the owners in the limited partnership. a. true b. false Q2. Which of the following best reflects the mix of corporate securities issued in the U.S.? a. 74% debt, 26% equity b. 55% debt, 45% equity c. 45% debt, 55% equity d. 26% debt, 74% equity Q3. Roxbury Brothers has sales of $2,250,000; a gross profit of $825,000; total operating costs of $620,000; income taxes of $74,800; and total assets of $995,000. What is Roxbury's Operating Income Return on Investment? a. 36.67% b. 14.32% c. 20.60% d. 4.99% Q4. Which of the following is a real asset? a. preferred stock b. inventory c. bonds d. commissions Q5. An advantage of the OIROI ratio is that it: a. ignores the firm's financing policies. b. uses net income to measure efficiency. c. combines total asset turnover and gross profit margin. d. simply assumes that a firm is financed 50% by equity and 50% by debt. Q6. The cash conversion cycle exceeds the sum of days of sales outstanding and days of sales in inventory. a. true b. false Q7. Which of the following represents an attempt to measure the net results of the firm's operations (revenues versus expenses) over a given time period? a. Balance Sheet b. Statement of Cash Flows c. Income Statement d. Sources and Uses of Funds Statement Q8. Which of the following ratios would be the best way to determine how customers are paying for their purchases? a. Inventory turnover. b. Total asset turnover. c. Current ratio. d. Average collection period. Q9. The quick ratio of a firm would be unaffected by which of the following? a. land held for investment is sold for cash b. equipment is purchased, financed by a long-term debt issue c. inventories are sold for cash d. inventories are sold on a short-term credit basis Q10. You are considering an investment in a U.S. Treasury bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 2.0%; the maturity risk premium is 1.5%; and, the default risk premium for AAA rated corporate bonds is 3%. What rate of interest should the U.S. Treasury bond pay? a. 7.5% b. 4.5% c. 3.5% d. 3.0% Q11. Which of the following ratios would be the most useful to assess the risk associated with a firm being able to pay off its short-term line of credit? a. Return on equity. b. The acid test ratio. c. The operating profit margin. d. The fixed asset turnover. Q12. Registration of securities by the SEC indicates to investors that the risk of those securities is reasonable. a. true b. false Q13. Margin requirements are set by: a. the Chairman of the Federal Reserve. b. the Board of Governors of the Federal Reserve. c. the Secretary of the Treasury d. the Securities and Exchange Commission Q14. An example of a primary market transaction involving a money market security is: a. A new issue of a security with a very short maturity b. A new issue of a security with a very long maturity c. The transfer of a previously-issued security with a very short maturity d. The transfer of a previously-issued security with a very long maturity Q15. Which of the following is an advantage of the sole proprietorship? a. limited liability for its owners b. double taxation for its owners c. no significant legal requirements for starting the business d. easily transferred ownership Q16. In the aggregate, households usually spend more on current consumption than they earn. a. true b. false Q17. Britney and Christina Incorporated has a debt ratio of 0.42, noncurrent liabilities of $20,000 and total assets of $70,000. What is Britney and Christina's level of current liabilities? a. $8,400 b. $9,400 c. $12,348 d. $10,600 Q18. The quick ratio of a firm would be increased by which of the following? a. land held for investment is sold for cash b. equipment is purchased, financed by a long-term debt issue c. inventories are sold for cash d. inventories are sold in exchange for a long-term note e. both a and c above Q19. The Securities and Exchange Commission is responsible for setting margin requirements. a. true b. false Q20. Maximization of shareholder wealth as a goal is superior to profit maximization because: a. it considers the time value of the money b. it considers the time value of money and factors in uncertainty c. it ensures high stock prices d. it considers social benefits Q21. You are considering an investment in a U.S. corporate bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 2.0%; the maturity risk premium is 1.5%; and, the default risk premium for AAA rated corporate bonds is 3%. What rate of interest should the U.S. corporate bond pay? a. 7.5% b. 4.5% c. 3.5% d. 3.0% Q22. Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management? a. current ratio b. net profit margin c. quick ratio d. OIROI Q23. DuPont analysis indicates that the return on assets equals the return on equity when total assets equals common equity. a. true b. false Q24. To assist firms in issuing securities, the investment banker will lower their portion of the flotation costs when marketing riskier securities. a. true b. false Q25. PDQ Corp. has sales of $3,000,000; the firm's cost of goods sold is $1,425,000; and its total operating expenses are $700,000. The firm's interest expense is $230,000, and the corporate tax rate is 40%. What is PDQ's tax liability? a. $258,000 b. $350,000 c. $387,000 d. $645,000 Q26. The effective legal definition of corporation is "an artificial being, invisible, intangible, and existing only in the contemplation of law." a. true b. false Q27. One of the benefits of organized security exchanges is that they are said to provide a _____ market. a. continuous b. connected c. convenient d. cumbersome Q28. The telecommunications system that provides a national information linkup among brokers and dealers operating in the over-the-counter market is called: a. NCIS b. NSQA c. NASDAQ d. NASQ Q29. PDQ Corp. has sales of $3,000,000; the firm's cost of goods sold is $1,425,000; and its total operating expenses are $700,000. What is PDQ's EBIT? a. $ 825,000 b. $ 875,000 c. $1,575,000 d. $2,300,000 Q30. The investment banker performs what three basic functions: a. underwriting, distributing, and regulating b. underwriting, advising, and price-pegging c. underwriting, distributing, and negotiating d. underwriting, distributing, and advising Q31. A firm that wants to know if it has enough cash to meet its bills would be most likely to use which kind of ratio? a. liquidity b. leverage c. efficiency d. profitability Q32. Patti Corporation has current assets of $11,400, inventories of $4,000, and a current ratio of 2.6. What is Patti's acid test ratio? a. 1.69 b. 0.54 c. 0.74 d. 1.35 Q33. A Cash Flow Statement can be used to answer a variety of questions. Which of the following would this statement not be likely to answer? a. Why was money borrowed? b. Where did profits go? c. What is the current level of inventory? d. How was the retirement of debt accomplished? Q34. Which of the following relationships is true regarding the costs of issuing the following securities? a. common stock > bonds > preferred stock b. preferred stock > common stock > bonds c. bonds > common stock > preferred stock d. common stock > preferred stock > bonds Q35. Based on the information in the table, calculate the after tax cash flow from operations for 2002 (no assets were disposed of during the year, and there was no change in interest payable or taxes payable): Jones Company Financial Information December 2001 December 2002 Net income $1,500 $3,000 Accounts receivable 750 750 Accumulated depreciation 1,125 1,500 Common stock 4,500 5,250 Paid-in capital 7,500 8,250 Retained earnings 1,500 2,250 Accounts payable 750 750 a. $3,750 b. $3,375 c. $3,000 d. $2,250 Q36. Advantages of private placements do not include which of the following: a. more financing flexibility b. lower flotation costs c. investor protection through extensive regulation d. funds which are available more quickly than through a public offering Q37. The investment banker does not underwrite the securities to be issued in which of the following? a. competitive bid purchase b. negotiated purchase c. commission or best efforts basis d. direct sale Q38. The corporation is a legal entity separate from it owners; thus it is possible for the corporation to continue even upon the death of one or more shareholders. a. true b. false Q39. The investment banker does not underwrite the securities to be issued in which of the following? a. initial public offering b. primary market transaction c. firm commitment d. best efforts Q40. Shareholders react to poor investment or dividend decisions by causing the total value of the firm's stock to fall, and they react to good decisions by bidding the price of the stock up. a. true b. false Q41. General partners have unrestricted transferability of ownership, while limited partners must have the consent of all partners to transfer their ownership. a. true b. false Q42. The term structure of interest rates usually indicates that longer terms to maturity have higher expected returns. a. true b. false Q43. A corporation may normally exclude what percentage of dividend income received from another corporation? a. 70% b. 50% c. 35% d. 30% Q44. Why is the quick ratio a more refined liquidity measure than the current ratio? a. It measures how "quickly" cash and other liquid assets flow through the company. b. Inventories are generally the least liquid of the firm's current assets. c. Inventories are generally among the most liquid of the firm's current assets. d. Cash is the most liquid current asset. Q45. Financial intermediaries: a. offer indirect securities b. include the national and regional stock exchange c. usually are underwriting syndicates d. constitute the various secondary markets Q46. Management may use straight-line depreciation for reporting income to the shareholders while still using an accelerated method for calculating taxable income. a. true b. false Q47. Most sole proprietorships convert to a corporation within a few years due to increasing state and federal regulations. a. true b. false Q48. In a limited partnership at least one general partner must exist; that general partner has unlimited liability. a. true b. false Q49. In a general partnership there is a distinction between business and personal assets. a. true b. false Q50. The permissible time period for issuance of securities under shelf registration is directly related to the life of the issuing company. a. true b. false