Question 1. The CEO of High Tech International decides to change an accounting method at the end of the current year. The change results in reported profits increasing by 5%, but the company's cash flows are not changed. If capital markets are efficient, then
a. the stock price will not be affected by the accounting change.
b. the stock price will increase due to higher profits.
c. the stock price will increase only if the accounting change will also result in higher profits in the next year.
d. the stock price will decrease because accounting method changes are not permitted under generally accepted accounting principles.
Question 2. Which of the following forms of business organizations provide limited liability to all its owners?
a. general partnership
b. limited partnership
c. corporation
d. both B and C
Question 3. Which of the following categories of owners have limited liability?
a. general partners
b. sole proprietors
c. shareholders of a corporation
d. both A and B
Question 4. The primary goal of a publicly owned corporation is to ________.
a. maximize dividends per share
b. maximize shareholder wealth
c. maximize earnings per share after taxes
d. minimize shareholder risk
Question 5. If two companies have the same net income and the same level of risk, they must also have the same stock price or the market is not in equilibrium.
a. True
b. False
Question 6. 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
Question 7. Shareholder wealth maximization means
a. maximizing earnings per share.
b. maximizing dividends per share.
c. maximizing the price of existing common stock.
d. maximizing stockholders equity.
Question 8. The principle of risk-return tradeoff means that
a. higher risk investments must earn higher returns.
b. an investor who takes more risk will earn a higher return.
c. a rational investor will only take on higher risk if he expects a higher return.
d. an investor who bought stock in a small corporation five years ago has more money than an investor who bought U.S. Treasury bonds five years ago.
Question 9. Joe is deciding whether or not to invest $10,000 in a business that has pending lawsuits against it. If Joe invests and the business loses the lawsuits, the most Joe can lose is
a. $10,000 if Joe is a general partner.
b. $10,000 if Joe is a sole proprietor.
c. $10,000 if Joe is a limited partner.
d. $10,000 plus his share of the lawsuits if Joe is a limited partner.
Question 10. The financial manager most directly responsible for producing the company's financial statements and directing its cost accounting functions is the
a. chief financial officer.
b. controller.
c. treasurer.
d. vice president - financer.
Question 11. The prime lending rate is the base rate on
a. mortgage loans.
b. home equity loans.
c. auto loans.
d. corporate loans.
Question 12. If a corporation wants a guarantee that all of its shares of stock will be sold, it should use which of the following distribution methods?
a. competitive bid purchase
b. privileged subscription with no standby agreement
c. commission or best-efforts contract
d. direct sale
Question 13. General Motors raises money by selling a new issue of common stock. This transaction occurs in
a. the secondary market.
b. the capital market.
c. the money market.
d. the futures market.
Question 14. Suppose the following rates are averages for banks in your area: interest checking accounts pay 1%, savings accounts pay 2%, and one-year certificates of deposit pay 3%. All accounts are federally insured by the FDIC. The difference in rates can be explained mainly by
a. liquidity premiums.
b. default risk premiums.
c. maturity premiums.
d. inflation risk premiums.
Question 15. The stock market with the most stringent listing requirements is the
a. New York Stock Exchange (NYSE).
b. NASDAQ Stock Market.
c. American Stock Exchange (AMEX).
d. All organized exchanges have the same listing requirements in order to make trading fair for all investors.
Question 16. 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 1.5%; the maturity risk premium is 2.5%; and, the default risk premium for AAA-rated corporate bonds is 3.5%. What rate of interest should the U.S. Treasury bond pay?
a. 8.5%
b. 6.0%
c. 5.0%
d. 2.5%
Question 17. The Securities and Exchange Commission (SEC)
a. regulates only initial public offerings, or IPOs.
b. regulates only primary market transactions to ensure investors are provided with adequate and accurate information on new securities.
c. regulates both primary and secondary markets.
d. regulates initial public offerings, but not seasoned equity offerings, in the primary market.
Question 18. The nominal interest rate is 7% and the expected inflation rate is 2%. Based on the Fisher effect, the real rate of interest is
a. 5.0%.
b. 6.86%.
c. 5.1%.
d. 4.9%.
Question 19. When an investment banking firm "underwrites" an issue of securities, the firm is performing which of the following?
a. agreeing to market the securities to investors for a fee
b. giving legal advice to the firm that is issuing the securities
c. offering to purchase the securities from the firm, thereby assuming the risk of resale to investors
d. agreeing to provide insurance that the firm's securities will sell for a price that is established by the firm
Question 20. General Electric (GE) has been a public company for many years with its common stock traded on the New York Stock Exchange. If GE decides to sell 500,000 shares of new common stock, the transaction will be describe as
a. an initial public offering.
b. a secondary market transaction because GE common stock has been trading for years.
c. a seasoned equity offering because GE has sold common stock before.
d. a money market transaction because GE raises new money to fund its business.
Question 21. Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's gross profit is equal to
a. $770,000.
b. $1,070,000.
c. $1,100,000.
d. $1,500,000.
Question 22. A firm paid dividends of $10,000, paid interest of $20,000, reduced debt principal outstanding (paid off debt) in the amount of $100,000, and sold new stock for $150,000. What was the firm's cash flow from financing activities?
a. +$20,000 ($20,000 flowed into the firm)
b. -$20,000 ($20,000 flowed out of the firm)
c. +$280,000 ($280,000 flowed into the firm)
d. -$280,000 ($280,000 flowed out of the firm)
Question 23. A corporation has annual sales of $18 million, total assets of $4 million, a debt ratio of 40%, depreciation expense of $200,000, and a tax rate of 40%. The corporation's total stockholders' equity is equal to
a. $5,600,000.
b. $2,800,000.
c. $2,400,000.
d. $1,800,000.
Question 24. Company A and Company B both report the same level of sales and net income. Therefore
a. both A and B will report the same Earnings Per Share.
b. both A and B will report the same Gross Profit Margin.
c. both A and B will report the same Net Profit Margin.
d. both A and C are true.
Question 25. The more debt a company uses to finance its assets, the lower will be its operating income due to higher interest expense.
a. True
b. False
Question 26. Which of the following accounts belongs on the asset side of a balance sheet?
a. depreciation expense
b. accounts payable
c. inventory
d. accruals
Question 27. The increase in owners equity for a given period is equal to
a. positive net cash flow minus dividends.
b. net income minus dividends.
c. sales minus dividends.
d. gross profit minus distributions to shareholders.
Question 28. Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's net profit margin is equal to
a. 25.67%.
b. 35.67%.
c. 36.67%.
d. 50.00%.
Question 29. Siskiyou Corp. has cash of $75,000; short-term notes payable of $100,000; accounts receivables of $275,000; accounts payable of $135,000: inventories of $350,000; and accrued expenses of $75,000. What is the firm's net working capital?
a. $390,000
b. $175,000
c. $700,000
d. $210,000
Question 30. What information does a firm's balance sheet provide to the viewing public?
a. a report of investments made and their cost for a specific period of time
b. a complete listing of all of a firm's cash receipts and cash expenditures for a defined period of time
c. a report of revenues and expenses for a defined period of time
d. an itemization of all of a firm's assets, liabilities, and equity as of the balance sheet date
Question 31. RBW Corp. has cash of $48,000; short-term notes payable of $35,000, accounts receivable of $100,000; accounts payable of $120,000; inventories of $200,000; and accruals of $90,000. What is RBW's current ratio?
a. 1.57
b. 2.71
c. 1.42
d. 0.64
Question 32. Which of the following transactions will increase a corporation's operating return on assets?
a. sell stock and use the money to pay off some long-term debt
b. sell 10-year bonds and use the money to pay off current liabilities
c. negotiate a new contract that lowers raw material costs by 10%
d. increase sales by 10%
Question 33. TransSystems Inc. has a total equity of $560,000; sales of $2,250,000; total assets of $995,000; and current liabilities of $310,000. What is TransSystems Inc.'s debt ratio?
a. 55.4%
b. 43.7%
c. 31.2%
d. 66.7%
Question 34. An analyst is evaluating two companies, A and B. Company A has a debt ratio of 50% and Company B has a debt ratio of 25%. In his report, the analyst is concerned about Company B's debt level, but not about Company A's debt level. Which of the following would best explain this position?
a. Company B has much higher operating income than Company A.
b. Company A has a lower times interest earned ratio and thus the analyst is not worried about the amount of debt.
c. Company B has a higher operating return on assets than Company A, but Company A has a higher return on equity than Company B.
d. Company B has more total assets than Company A.
Question 35. Rural Hydroponics has total equity of $560,000; sales of $2,250,000; current assets of $700,000; and total liabilities of $435,000. What is Rural Hydroponics' total asset turnover?
a. 4.02
b. 3.21
c. 2.26
d. 5.51
Question 36. When comparing inventory turnover ratios, other things being equal
a. a lower inventory turnover is preferred in order to keep inventory costs low.
b. a higher inventory turnover is preferred to improve liquidity.
c. higher inventory turnover results from old or obsolete inventory increasing the inventory balance on the balance sheet.
d. higher inventory turnover results from an increase in the selling price of the product.
Question 37. 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
Question 38. WRJ has a debt ratio of .4, current liabilities of $18,000, and total assets of $120,000. What is the level of WRJ's total liabilities?
a. $22,000
b. $48,000
c. $58,000
d. $63,934
Question 39. 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 (or quick) ratio
c. the operating profit margin
d. the fixed asset turnover
Question 40. HighLev Incorporated borrows heavily and uses the leverage to boost its return on equity to 30% this year, nearly 10% higher than the industry average. However, HighLev's stock price decreases relative to its industry counterparts. How is this possible?
a. Markets are inefficient and fail to recognize the benefits of leverage.
b. The increased debt resulted in interest payments that made HighLev's operating income drop even though return on equity increased.
c. Shareholders are not interested in return on equity.
d. the high levels of debt increased the riskiness of HighLev relative to its competitors.