Quiz I

Question 1

A business created as a distinct legal entity and treated as a legal “person” is called a:

Answer 1

corporation

Question 2

A stakeholder is:

Answer 2

any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.

Question 3

Which of the following questions are addressed by financial managers?

I. How should a product be marketed?

II. Should customers be given 30 or 45 days to pay for their credit purchases?

III. Should the firm borrow more money?

IV. Should the firm acquire new equipment?

Answer 3

II, III, and IV only

Question 4

Which one of the following functions should be the responsibility of the controller rather than the treasurer?

a. daily cash deposit
b. income tax returns
c. equipment purchase analysis
d. customer credit approval
e. payment to a vendor

Answer 4

Income tax returns

Question 5

Which one of the following is a capital budgeting decision?

a. determining how many shares of stock to issue
b. deciding whether or not to purchase a new machine for the production line
c. deciding how to refinance a debt issue that is maturing
d. determining how much inventory to keep on hand
e. determining how much money should be kept in the checking account

Answer 5

deciding whether or not to purchase a new machine for the production line

Question 6

Which one of the following is a capital decision?

a. determining which one of two projects to accept
b. determining how to allocate investment funds to multiple projects
c. determining the amount of funds needed to finance customer purchases of a new product
d. determining how much debt should be assumed to fund a project
e. determining how much inventory will be needed to support a project

Answer 6

determining how much debt should be assumed to fund a project

Question 7

The decision to issue additional shares of stock is an example of which one of the following?

a. working capital management
b. net working capital decision
c. capital budgeting
d. controller’s duties
e. capital structure decision

Answer 7

capital structure decision

Question 8

Which of the following accounts are included in working capital management?

I. accounts payable

II. accounts receivable

III. fixed assets

IV. inventory

Answer 8

I, II, and IV only

Question 9

Which one of the following is a working capital management decision?

a. determining the amount of equipment needed to complete a job
b. determining whether to pay cash for a purchase or use the credit offered by the supplier
c. determining the amount of long-term debt required to complete a project
d. determining the number of share of stock to issue to fund an acquisition
e. determining whether or not a project should be accepted

Answer 9

determining whether to pay cash for a purchase or use the credit offered by the supplier

Question 10

Which one of the following statements concerning a sole proprietorship is correct?

a. a sole proprietorship is designed to protect the personal assets of the owner
b. the profits of sole proprietorship are subject to double taxation
c. the owner of a sole proprietorship is personally responsible for all of the company’s debts
d. there are very few sole proprietorships remaining in the U.S. today
e. a sole proprietorship is structured the same as a limited liability

Answer 10

The owner of a sole proprietorship is personally responsible for all of the company’s debts

Question 11

Which one of the following statements concerning a sole proprietorship is correct?

a. The life of a sole proprietorship is potentially unlimited.
b. A sole proprietor can generally raise large sums of capital quite easily.
c. Transferring ownership of a sole proprietorship is easier than transferring ownership of a corporation.
d. A sole proprietorship is taxed the same as a C corporation.
e. It is easy to create a sole proprietorship.

Answer 11

It is easy to create a sole proprietorship

Question 12

Which one of the following best describes the primary advantage of being a limited partner instead of a general partner?

a. The majority of firms in the U.S. are structured as corporations.
b. Maximum loss limited to the capital invested.
c. Corporations can raise large amounts of capital generally easier than partnerships can.
d. Stockholders face no potential losses related to their corporate investment.
e. Corporate shareholders elect the corporate president.

Answer 12

maximum loss limited to the capital invested

Question 13

Which one of the following statements is correct?

a. the majority of firms in the U.S. are structured corporations.
b. Corporate profits are taxable income to the shareholders when earned.
c. Corporations can raise large amounts of capital generally easier than partnerships can.
d. Stockholders face no potential losses related to their corporate investment.
e. Corporate shareholders elect the corporate president.

Answer 13

c. Corporations can raise large amounts of capital generally easier than partnerships can.

Question 14

Which one of the following business types is best suited to raising large amounts of capital?

a. sole proprietorship
b. limited liability company
c. corporation
d. general partnership
e. limited partnership

Answer 14

c. corporation

Question 15

Why should financial managers strive to maximize the current value per share of the existing stock?

Answer 15

because they have been hired to represent the interests of the current shareholders

Question 16

The Sarbanes-Oxley Act of 2002 is a governmental response to:

Answer 16

management greed and abuses

Question 17

Which one of the following is an unintended result of the Sarbanes-Oxley Act?

a. decreasing corporate profits.
b. the terrorists attacks on 9/11/2001.
c. corporations delisting from major exchanges.
d. deregulation of the stock exchanges.
e. management greed and abuses.

Answer 17

corporations delisting from major exchanges

Question 18

Which one of the following actions by a financial manager is most apt to create an agency problem?

a. refusing to borrow money when doing so will create losses for the firm
b. refusing to lower selling prices if doing so will reduce the net profits
c. refusing to expand the company if doing so will lower the value of the equity
d. agreeing to pay bonuses based on the market value of the company stock rather than on the firm’s level of sales
e. increasing current profits when doing so lowers the value of the firm’s equity

Answer 18

e. increasing current profits when doing so lowers the value of the firm’s equity

Question 19

Which form of business structure is most associated with agency problems?

a. sole proprietorship
b. general partnership
c. limited partnership
d. corporation
e. limited liability company

Answer 19

d. corporation

Question 20

Activities of a firm which require the spending of cash are known as:

Answer 20

uses of cash

Question 21

A common-size income statement is an accounting statement that expresses all of a firm’s expenses as a percentage of:

Answer 21

sales

Question 22

Which one of the following standardizes items on the income statement and balance sheet relative to their values as of a common point in time?

Answer 22

common-base year statement

Question 23

Relationships determined from a firm’s financial information and used for comparison purposes are know as:

Answer 23

financial ratios

Question 24

The formula which breaks down the return on equity into three component parts is referred to as which one of the following?

Answer 24

Du Pont identity

Question 25

Which one of the following is a source of cash?

Answer 25

decrease in inventory

Question 26

Shareholders probably have the most interest in which one of the following sets of ratios?

Answer 26

return on equity and price-earnings

Question 27

It is easier to evaluate a firm using financial statements when the firm:

Answer 27

uses the same accounting procedures as other firms in the industry

Question 28

Tracy invested $1,000 five years ago and earns 4 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?

Answer 28

compounding

Question 29

The process of determining the present value of future cash flows in order to know their worth today is called which one of the following?

Answer 29

discounted cash flow valuation

Question 30

Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal invests $5,000 at 7 percent when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts?

Answer 30

Sue will have more money than Neal as long as they retire at the same time

Question 31

Which one of the following will produce the highest present value interest factor?

Answer 31

6 percent interest for five years

Question 32

What is the relationship between present value and future value interest factors?

Answer 32

The factors are reciprocals of each other

Question 33

Which one of the following statements correctly states a relationship?

Answer 33

Time and present value are inversely related, all else held constant

Question 34

Which one of the following compounding periods will yield the smallest present value given a stated future and annual percentage rate?

Answer 34

continous

Question 35

The entire repayment of which one of the following loans is computed simply by computing a single future value?

Answer 35

pure discount loan

Question 36

What is the interest rate charged per period multiplied by the number of periods per year called?

Answer 36

annual percentage rate

Question 37

Jensen Enterprises paid $520 in dividends and $655 in interest this past year. Common stock increased by $205 and retained earnings decreased by $91. What is the net income for the year? (note: remember that NI = dividends + retained earnings.)

Answer 37

$429

Explanation
Net income = dividends + retained earnings = $520 + (-$91) = $429