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BUSI 530 Corporate Finance Exam 1 Help
Q1. Which of the following statements best distinguishes the difference between real and financial assets?
- Real assets have less value than financial assets.
- Real assets are tangible; financial assets are not.
- Financial assets represent claims to income that is generated by real assets.
- Financial assets appreciate in value; real assets depreciate in value.
Q2. Which one of these is a disadvantage of the corporate form of business?
- Access to capital
- Unlimited personal liability for owners
- Limited firm life
- Legal requirements
Q3. Financial managers should only accept investment projects that:
- increase the current profits of the firm.
- can increase the firm’s market share.
- earn a higher rate of return than the firm currently earns on its existing projects.
- earn a higher rate of return than shareholders can get by investing on their own.
Q4. In a firm having both a treasurer and a controller, which of the following would most likely be handled by the controller?
- Internal auditing
- Credit management
- Banking relationships
- Insurance
Q5. A corporate director:
- is selected by and can be removed by management.
- can be voted out of power by the shareholders.
- has a lifetime appointment to the board.
- is selected by a vote of all corporate stakeholders.
Q6. A corporate board of directors should provide support for the top management team:
- under all circumstances.
- in all decisions related to cash dividends.
- only when the board approves of management’s actions.
- if shareholders are pleased with the firm’s performance.
Q7. A financial analyst in a corporation may be involved with all of the following EXCEPT:
- analyzing a new investment project.
- monitoring risk.
- managing investment of the company’s cash.
- purchasing the firm’s plant and equipment.
Q8. Which one of these was a contributing factor to the need for many foreign banks to seek aid from their governments as a result of the financial crisis of 2007-2009?
- Decrease in their exchange rates
- Investments in U.S. subprime mortgages
- Interest rate spikes
- Currency controls
Q9. Which one of the following financial intermediaries has shown the greatest preference for investing in long-term financial assets?
- Commercial banks
- Insurance companies
- Finance companies
- Savings banks
Q10. Firms can often determine the price of any commodities they use in their production process by consulting the price quotes provided by:
- their investment bank.
- the New York Mercantile Exchange.
- the New York Stock Exchange.
- the Standard & Poor’s market indexes.
Q11. In the United States, banks are the most important source of long-term financing for corporations.
- True
- False
Q12. Liquidity is important to a mutual fund primarily because:
- a fund that is less liquid will attract more investors.
- the fund’s shareholders may want to redeem their shares at any time.
- new investors may invest in the fund at any time.
- the fund requires cash to pay its taxes.
Q13. One contributing factor to the 2007-2009 financial crisis was the structuring of mortgage loans with:
- high initial payments, offset by significantly lower payments later.
- low initial payments, offset by significantly higher payments later.
- high initial payments, offset by high payments later.
- very short maturities.
Q14. Which one of the following is the biggest provider of payment mechanisms?
- Hedge funds
- Banks
- Mutual funds
- Insurance companies
Q15. If the market value of assets is high, then the market value of liabilities must be high also.
- True
- False
Q16. The statement of cash flows shows the firm’s cash inflows and outflows from operations as well as from its investments and financing activities.
- True
- False
Q17. If market interest rates have increased since a company last borrowed long-term funds, the market value of these long-term funds will likely be:
- greater than their book value.
- less than their book value.
- equal to their book value.
- unknown without knowing the maturity of the debt.
Q18. If the balance sheet of a firm indicates that total assets exceed current liabilities plus shareholders’ equity, then the firm has:
- no retained earnings.
- long-term debt.
- no accumulated depreciation.
- current assets.
Q19. Net working capital is a measure of a company’s:
- goodwill.
- short-term liabilities.
- estimated cash reservoir.
- shareholders’ equity.
Q20. Professor Diehard found an effective antibiotic for the DEPRESS bacteria, and patented the drug. He believes that he could sell the patent for $20 million. He then formed a corporation and invested $400,000 in setting up a production plant. There are 2 million shares of stock outstanding. If the professor’s belief is correct, what would be the price per share and the book value per share?
- $10.20; $0.20
- $10.00; $0.20
- $9.80; $0.40
- $9.80; $0.20
Book value equals the $400,000 Professor Diehard has contributed in tangible assets. Market value equals the value of his patent plus the value of the production plant, or $20.4 million. Price per share = $20.4 million/2 million shares = $10.20. Book value per share = $400,000/2 million shares = $0.20.
Q21. Amy wants to know if inventory is increasing as a percentage of total assets. Which one of these statements most easily provides the information she is seeking?
- Statement of cash flows
- Balance sheet
- Common-size balance sheet
- Income statement
Q22. What happens to the market value of a firm’s equity as the book value of the firm’s equity increases?
- It increases by the same amount.
- It decreases by the same amount.
- It remains constant.
- There is no set relationship to determine this outcome.
Q23. What is the inventory turnover ratio for ABC Corp. if cost of goods sold equals $5,000, current ratio equals 3, quick ratio equals 1.5, and the firm has $1,800 in current assets?
- 2.78 times
- 4.17 times
- 5.56 times
- 8.33 times
Current ratio = current assets / current liabilities
3 = $1,800 / current liabilities
Current liabilities = $600
Quick ratio = (current assets − inventory) / current liabilities
1.5 = ($1,800 − inventory) / $600
Inventory = $900
Inventory turnover = cost of goods sold / inventory
Inventory turnover = $5,000 / $900
Inventory turnover = 5.56 times
Q24. A deficiency of the standard measures of liquidity is that the measures:
- ignore a firm’s reserve borrowing capacity.
- fail to include accounts receivable as an asset.
- give inventories equal weighting in the quick ratio.
- do not include the current portions of long-term debt.
Q25. Calculate the average collection period for Dots Inc. if its accounts receivables were $550 at the beginning of a year in which the firm generated $3,000 of sales?
- 60 days
- 61 days
- 67 days
- 73 days
Average collection period = $550 / ($3,000 / 365) = 67 days
Q26. Balsco’s balance sheet shows total assets of $238,000 and total liabilities of $107,000. The firm has 55,000 shares of stock outstanding that sell for $11 a share. What is amount of market value added?
- $389,000
- $474,000
- $1,073,000
- $123,712
Market value added = (55,000 × $11) − ($238,000 − 107,000) = $474,000
Q27. The use of debt in the firm’s capital structure will increase ROE if the firm:
- has more debt than equity.
- pays less in taxes than in interest.
- earns a higher return than the rate paid on debt.
- has a times interest earned ratio greater than 1.0.
Q28. What are the annual sales for a firm with $400,000 in debt, a total debt ratio of 0.4, and an asset turnover of 3?
- $333,333
- $1,200,000
- $1,800,000
- $3,000,000
Total debt ratio = Total debt / Total assets, so:
Assets = $400,000 / 0.4 = $1,000,000
Asset turnover ratio = Sales / Total assets, so:
Sales = $1,000,000 × 3 = $3,000,000
Q29. Which of the following will allow your firm to achieve its targeted 16% ROA with an asset turnover of 2.5?
- A leverage ratio of .0667
- A P/E ratio of 14
- A return on equity of 25%
- An operating profit margin of 6.4%
ROA = Operating profit margin × Asset turnover
0.16 = Operating profit margin × 2.50
Operating profit margin = 0.064, or 6.4%
Q30. A firm has average daily expenses of $2.13 million and average accounts payable of $112.7 million. On average, how many days does it take the firm to pay its bills?
- 63.47 days
- 52.91 days
- 48.19 days
- 59.03 days
$112.7m / $2.13m = 52.91 days