1. Which of the following is true regarding corporate governance?
A) The crisis in Corporate Governance of the late 90's and early 2000's was primarily caused by Activist Investors
B) It is typical in the Anglo-American model for a company to be owned by one majority shareholder that manages the company according their interests
C) From the 1980's to the 1990's it became easier to fire CEO's for poor performance
D) Corporate Defense Mechanisms against takeovers were active in the 1980's but are no longer prevalent in corporate governance
E) In the Rest of the World model, there are minority shareholders that own a company and are represented by a Board of Directors
2. Why did Bernard Madoff's Ponzi scheme fall apart?
A) Too many new investors wanted him to manage their portfolios
B) The SEC investigation revealed his scheme
C) There was a financial crisis and too many investors withdrew their money
D) His auditor turned him in
E) He lacked the name recognition to attract investors
3. Assume a firm has $12.5 million in operating profit. The firm's tax rate is 40%. What is the tax shield of the firm's $50 million in debt that charges an 8% interest rate?
A) $1.0 million
B) $20 million
C) $1.6 million
D) $2.4 million
E) $4.0 million
4. In which managerial defense mechanism does the target company look to fend off a hostile takeover by providing big bonuses to their executives if employment is terminated?
A) Crown Jewels
B) Greenmail
C) Golden Parachutes
D) Poison Pill
E) The White Knight
5. Which of the following events would increase a company's cash flow?
Event A: Accounts Receivable turnover ratio went from 10.0 to 8.0
Event B: Accounts Payable turnover ratio went from 8.0 to 4.0
Event C: Issued a dividend of $1.50 per share
Event D: Bought $5M office building
Event E: Increase in inventory
A) Event C
B) Event D
C) Event E
D) Event A
E) Event B
6. Which company had the highest growth rate in revenues?
A) Company D: 2014 - $9, 2015 - $13
B) Company A: 2014 - $300, 2015 - $400
C) Company B: 2014 - $100, 2015 - $120
D) Company A: 2014 - $12, 2015 - $16
E) Company C: 2014 - $500, 2015 - $650
7. On a common size balance sheet, Accounts payable is expressed as a percentage of what value?
A) Total Liabilities & Shareholders' Equity
B) Total Liabilities
C) Cost of Goods Sold (COGS)
D) Revenue
E) Shareholders' Equity
8. Which of the following is true of financial statements?
A) Revenue is included on the cash flow statement
B) Depreciation only affects the income statement, not the balance sheet or cash flow statement
C) Total assets must equal total liability minus shareholders' equity
D) Balance sheets show the market value of assets
E) A company's primary source of cash flow is typically from operating activities
9. Calculate the ROE using the DuPont Model (strategic profit model) for a company with the following data:,
Profit margin = 11%
Total Asset Turnover = 2.4
Inventory Turnover = 1.6
Equity Multiplier = 0.75
Current Ratio = 2.2
A) 39%
B) 13%
C) 58%
D) 18%
E) 20%
10. Which would most likely cause a profitable company to run out of cash?
A) The company is delaying payments to its suppliers
B) High liquidity ratios
C) The company is increasing inventory for an anticipated sales increase
D) The company has low profit margins
E) Customers are paying their bills more quickly
11. Which of the following is TRUE regarding Company ABC given the following information?
Current Assets = $350
Fixed Assets = $120
Current Liabilities = $200
Long Term Debt = $110
Sales = $600
Net Income = $140
A) Shareholders' Equity = $160
B) Return on Equity = 17%
C) Debt to Equity Ratio = 0.92
D) Current Ratio = .6
E) Asset Turnover = 5
12. According to the Revenue Recognition Principle in GAAP:
A) Companies can realize certain gains on their operating books, while omitting them from their tax books
B) Companies can realize revenue only if the transaction is profitable
C) Dividends can be paid only after taxable income is positive
D) Expenses can be realized when cash payment is made
E) Revenue is recognized when a good or service is provided, not when the money is received
13. Which financial ratio is of most interest to suppliers?
A) Debt to equity ratio
B) Total Asset Turnover
C) Current ratio
D) Accounts payable Turnover
E) Return on Equity
14. Nittany Co. purchased a new truck for its operations. Where is this transaction represented in the financial statements?
A) Cost of Goods Sold
B) Accounts Receivable
C) Depreciation Expense
D) Property, Plant and Equipment
E) Inventory
15. Given the following information, which is ratio is correct?
Revenue: $8,000
Operating Profit (EBIT): $2,000
Interest Expense: $750
Net Profit: $800
Total Assets: $7,500
A) Net Profit Margin = 4.29%
B) Total Asset Turnover = 1.40
C) Times Interest Earned = 2.7x
D) Return on Assets = 11.4%
E) Common Size Interest Expense = 5%
16. Given the following information, which is true?
Company 1 - Current Ratio: 2.3x, Times Interest Earned: 3.2x, Inventory Turnover: 6.0x
Company 2 - Current Ratio: 0.7x, Times Interest Earned: 1.4x, Inventory Turnover: 3.2x
Company 3 - Current Ratio: 1.3x, Times Interest Earned: 5.7x, Inventory Turnover: 3.4x
A) Company 2 has the highest probability of defaulting on its debt
B) Company 2 is the most liquid firm
C) Company 1 is the least efficient at managing inventory
D) Lenders would view Company 3 as higher risk of default than company 2
E) Company 3 is more liquid than Company 1
17. Given the following information, calculate X Company's Cost of Goods Sold and Gross Margin.
Revenue: $2,500
SG&A: 650
Taxes: 50
Gross Profit: $1150
A) Cost of Goods Sold= $700, Gross Margin = 28%
B) Cost of Goods Sold= $1,350, Gross Margin = 46%
C) Cost of Goods Sold= $500, Gross Margin=37%
D) Cost of Goods Sold= $1,850, Gross Margin = 74%
E) Cost of Goods Sold= $2,950, Gross Margin = 46%
18. Which of the following statements is true
A) Issuance of stocks creates an Intangible Asset
B) Changes in Accounts Payable is a cash flow from financing activities
C) Purchase of Property, plant and equipment is a cash flow from investing activities
D) Disposal of Fixed Assets is a cash flow from operating activities
E) Stock purchase and dividend payments are cash flows from operating activities
19. Which of the following is true regarding depreciation methods and deferred taxes?
A) Using accelerated depreciation methods for fixed assets provides for higher reported net income than straight line depreciation
B) Companies report lower depreciation and higher net income using accelerated depreciation for fixed assets
C) The primary source of deferred taxes is from companies' use of accelerated depreciation in reporting net income to the Internal Revenue Service
D) The primary source of deferred taxes is companies' use of straight line depreciation when reporting to shareholders
E) Companies report higher depreciation and net income using straight line depreciation for fixed assets
20. An apparel company sold its manufacturing facilities and recorded the proceeds as revenue. This is an example of which unethical behavior
A) fraud
B) shifting expenses to a later period
C) recording revenue too soon
D) boosting income with one-time gain
E) income smoothing
21. Given the following, calculate WACC for company XYZ:
Debt: $1,200
ROE: 15%
Equity: $4,500
Interest Cost on Debt: 5.0%
Cost of Equity: 8.0%
Tax Rate: 40.0%
A) 8.0%
B) 13%
C) 4.05%
D) 7.37%
E) 6.95%
22. What is the purpose of the unethical behavior known as income smoothing?
A) To mask previous bad investments
B) To increase the amount of assets reported on the balance sheet
C) To appear more profitable than competitors in all fiscal quarters
D) To increase the amount that can be paid in dividends
E) To make profits appear more consistent than they are
23. Which of the following is true regarding capital budgeting?
A) Capital budgeting is related to day to day financial operations of a business
B) A company should invest in projects with a positive ROI
C) A company should invest in projects with a projected ROI
D) A company should invest in projects with a projected ROI > than cost of capital (WACC)
E) Issuing long term debt is an example of a capital budgeting decision
24. Based on the following, which is true?
Company 1 - Return on Assets: 12.0%, Net Profit Margin: 5.8%, Debt / Equity: 1.9x
Company 2 - Return on Assets: 15.0%, Net Profit Margin: 6.5%, Debt / Equity: 0.7x
Company 3 - Return on Assets: 10.0%, Net Profit Margin: 5.0%, Debt / Equity: 1.0x
A) Company 2 is the least efficient at generating sales on its assets
B) Company 1 is the worst at generating profits from its assets
C) Company 1 is better at generating profits from its sales than Company 2
D) Company 2 is the least leveraged firm
E) Company 3 is the most leveraged firm
25. Based on the following, which is true?
Company 1 - A/R Days: 20, Inventory Days: 15, Payable Days: 25
Company 2 - A/R Days: 10, Inventory Days: 25, Payable Days: 15
A) Company 2 has a longer operating cycle and cash conversion cycle
B) Company 1 has a longer operating cycle but a shorter cash conversion cycle
C) Both companies' have the same operating cycle
D) Both companies receive payment from customers before paying suppliers
E) Company 2 has a negative cash conversion cycle, meaning it pays its receives payment from customers before paying suppliers
26. Which of the following is true regarding debt and equity financing?
A) A company with a low tax rate has a greater advantage in using debt financing than a company with a high tax rate
B) The optimum capital structure is where weighted average cost of capital (WACC) is maximized
C) The primary trade-off in capital structure decisions is tax savings and financial distress costs of debt
D) As a company uses more equity financing, the value of the firm always increases
E) The disadvantage to equity financing is fixed financing cost of dividends
27. What is one way of the top 5 ways to spot earnings mismanagement?
A) Reserves have stayed consistent for the company over time
B) Earnings growth fluctuates year to year
C) Small and infrequent one-time charges
D) A company's earnings are similar to the industry's norm
E) Cash flow and earnings are not correlated
28. Which of the following is true regarding capital structure?
A) Companies with large amounts of intangible assets (pharmaceuticals, software) usually employ small amounts of debt because their assets cannot be used to collateralize loans
B) Capital-intensive businesses (utilities) use mostly equity because their assets generate a large return
C) Small tech companies generally employ high amounts of debt so that they can grow quickly
2728D) Firms in risky industries (biotech) use large amounts of debt because the fixed payment obligations guarantee consistent cash flow
E) Optimal capital structure is the same across all industries
29. Given the following information, calculate WoolridgeCo's +-jjnbk.
Revenue: $10,000,000
COGS: $5,000,000
EBIT: $3,000,000
Net Income: $1,000,000
Avg. Inventory: $800,000
Avg. Receivables: $700,000
Avg. Payables: $700,000
A) 26 days
B) -51 days
C) 84 days
D) 33 days
E) 58 days
30. Which of the following is true?
A) A negative cash conversion cycle means that companies receive payment from customers before paying their suppliers
B) Using more debt in a company's capital structure will always result in lower WACC
C) Decreasing WACC decreases company value
D) Decreasing operating cycle means that the company is not collecting payment from its customers as quickly
E) Carrying costs from holding current assets are very difficult to measure