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Fundamentals of Corporate Finance 9th Canadian Edition By Ross – Test Bank 

SAMPLE QUESTIONS

 

Exam

 

Name___________________________________

 

 

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

 

1) Which one of the following actions is the best example of an agency problem?             1)

  1. A) Paying management bonuses based on the number of store locations opened during the year.

 

  1. B) Basing management bonuses on the attainment of specific financial goals.

 

  1. C) Accepting a project that enhances both management salaries and the market value of the firm’s stock.

 

  1. D) Requiring stockholders approval of all management compensation decisions.

 

  1. E) Paying management bonuses based on the current market value of the firm’s stock.

 

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

2) Which one of the following best describes the primary advantage of being a limited   2)

partner rather than a general partner?

  1. A) Entitlement to a larger portion of the partnership’s income.
  2. B) Liability for firm debts limited to the capital invested.
  3. C) Greater management responsibility.
  4. D) Ability to manage the day-to-day affairs of the business.
  5. E) No potential financial loss.

Answer: B

Explanation:       A)

  1. B)
  2. C)
  3. D)
  4. E)

3) Which of the following accounts does not relate to working capital management         3)

decisions?

  1. A) Short-term debt.
  2. B) Accounts receivable.
  3. C) Long-term debt.
  4. D) Inventory.
  5. E) Accounts payable.

Answer: C

Explanation:       A)

  1. B)
  2. C)
  3. D)
  4. E)

 

 

 

 

1

 

4)            The corporate officer generally responsible for tasks related to tax management, cost accounting, financial accounting, and data processing is the:

  1. A) Chairman of the Board.

 

  1. B) Corporate Treasurer.

 

  1. C)

 

  1. D) Vice President of Operations.

 

  1. E) Corporate Controller.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

5)            The corporate officer generally responsible for tasks related to cash and credit management, financial planning, and capital expenditures is the:

  1. A) Corporate Controller.

 

  1. B) Chairman of the Board.

 

  1. C) Vice President of Operations.

 

  1. D) Corporate Treasurer.

 

  1. E)

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

6)            The mixture of debt and equity used by the firm to finance its operations is called:

 

  1. A) Agency cost analysis.

 

  1. B) Financial depreciation.

 

  1. C) Capital budgeting.

 

  1. D) Working capital management.

 

  1. E) Capital structure.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

 

4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

7)            The Board of Directors of Beeline, Inc. has decided to base the salary of its financial manager entirely upon the market share of the firm. Accordingly,

  1. A) This arrangement may be unnecessary, since the goal of the firm is to maximize earnings for shareholders, and that is most likely accomplished through larger market share.
  2. B) The manager may not act to maximize the current value of the firm’s stock, resulting in agency costs for the firm’s stockholders.
  3. C) The firm will incur some agency costs if the manager acts to maximize market share.
  4. D) The financial manager will always act in the best interest of the shareholders since all agency costs have been eliminated through salary incentives.
  5. E) The firm may incur some agency costs since the manager will be focused on the market share of the firm rather than acting to maximize earnings.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

8)            Which of the following does NOT persuade managers to work in the best interest of the stockholders?

  1. A) Purely cash compensation package.

 

  1. B) Threat of a company takeover.

 

  1. C) Compensation based on the value of the stock.

 

  1. D) Stock option plans.

 

  1. E) Threat of a proxy fight.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

9)            A partnership:

 

  1. A) Has less of an ability to raise capital than a proprietorship.

 

  1. B) Is taxed the same as a corporation.

 

  1. C) Terminates at the death of any general partner.

 

  1. D) Agreement defines whether the business income will be taxed like a partnership or a corporation.

 

  1. E) Allows for easy transfer of interest from one general partner to another.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9)

 

 

 

3

 

10)          The best definition of “agency problem” is:

 

  1. A) Determining the optimal mix of internal and external board of directors.

 

  1. B) The process of planning and managing a firm’s long-term investments.

 

  1. C) The purchase or sale of securities whose value derives from the price of another, underlying, asset.

 

  1. D) The possibility of conflicts between shareholders and management in a large corporation.
  2. E) Determining who should be the agent of corporate executives.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

11)          In a limited partnership:

 

  1. A) A limited partner is liable only for the amount he/she contributed to the partnership.

 

  1. B) A general partner is liable only for the amount he/she contributed to the partnership.

 

  1. C) Only the limited partners are involved in the daily management of the firm.

 

  1. D) The income earned is taxed like a corporation.

 

  1. E) Both general and limited partners are involved in the daily management of the firm.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

12)          Which of the following questions is NOT the responsibility of the financial manager?

 

  1. A) Should the firm build a new factory?

 

  1. B) How long should customers be given to pay for their credit purchases?

 

  1. C) What product should the firm produce?

 

  1. D) How long will it take to produce a product?

 

  1. E) Should the firm borrow more money?

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

13)          When does the double taxation problem faced by corporations exist?

 

  1. A) Whenever a corporation earns a profit, pays taxes on that profit, and then pays dividends to its tax-exempt shareholders.

 

  1. B) Whenever a corporation earns a profit and pays taxes on that profit.

 

  1. C) Whenever a corporation earns a profit, pays taxes on that profit, and then pays interest to its bondholders.

 

  1. D) Whenever a corporation earns a profit, pays taxes on that profit, and then pays dividends to its stockholders who pay personal taxes.
  2. E) Whenever stockholders are paid a dividend and are taxed on that dividend income.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

14)          The original sale of securities by governments and corporations to the general public occurs in the:

  1. A) Proprietary market.

 

  1. B) Primary market.

 

  1. C) Secondary market.

 

  1. D) Liquidation market.

 

  1. E) Private placement market.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

15)          According to the statement of financial position model of the firm, corporate finance can be thought of as an analysis of three primary subject areas. Which of the following correctly lists these areas?

 

  1. A) Capital budgeting, capital structure, net working capital.

 

  1. B) Capital budgeting, capital structure, capital spending.

 

  1. C) Capital budgeting, capital spending, net working capital.

 

  1. D) Capital structure, capital budgeting, security analysis.

 

  1. E) Capital structure, net working capital, capital rationing.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15)

 

 

 

 

 

 

 

 

5

 

16)          Financial managers should strive to maximize the current value per share of the existing stock because:

  1. A) They have been hired for the purpose of representing the interest of the current shareholders.
  2. B) Doing so increases the salaries of all the employees.

 

  1. C) The managers often receive shares of stock as part of their compensation.

 

  1. D) Doing so means the firm is growing in size faster than its competitors.

 

  1. E) Doing so guarantees the company will grow in size at the maximum possible rate.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

17)          Which one of the following statements is correct concerning the TSX?

 

  1. A) Any corporation desiring to be listed on the TSX can do so.

 

  1. B) The TSX is the largest dealer market for listed securities in Canada.

 

  1. C) The TSX is the second largest stock exchange in the world.

 

  1. D) The TSX is an over-the-counter exchange functioning as both a primary and a secondary market.

 

  1. E) A firm is expected to have a market value for its publicly held shares of at least $4 million to be listed on the TSX.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

18)          The articles of incorporation:

 

  1. A) Set forth the rules by which the corporation regulates its existence.

 

  1. B) Set forth the number of shares of stock that can be issued.

 

  1. C) Can set forth the conditions under which the firm can avoid double taxation.

 

  1. D) Can be used to remove company management.

 

  1. E) Are amended annually by the company stockholders.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

16)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18)

 

 

 

 

 

 

 

 

 

 

 

6

 

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

 

  1. A) The legal costs to form a sole proprietorship are quite substantial.

 

  1. B) The owner can generally raise large sums of capital quite easily.

 

  1. C) The ownership of the firm is easy to transfer to another individual.

 

  1. D) The life of the firm is limited to the life span of the owner.

 

  1. E) The company must pay separate taxes from those paid by the owner.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

20)          Suppliers, customers, and employees of a corporation are called:

 

  1. A)

 

  1. B)

 

  1. C)

 

  1. D)

 

  1. E)

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

21)          A stakeholder is:

 

  1. A) Any person or entity that has voting rights based on stock ownership of a corporation.

 

  1. B) Any person or entity who potentially has a claim on the cash flows of the firm.

 

  1. C) Any person or entity that owns shares of stock of a corporation.

 

  1. D) A creditor to whom the firm currently owes money and who consequently has a claim on the cash flows of the firm.

 

  1. E) A person who initially started a firm and currently has management control over the cash flows of the firm due to his/her current ownership of company stock.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

19)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21)

 

 

 

 

 

 

 

 

 

 

 

 

7

 

22)          Which one of the following actions best meets the goal of financial management?

 

  1. A) Issuing additional shares of stock to increase the total cash on hand.

 

  1. B) Easing the accounts receivable policies in order to increase current sales.

 

  1. C) Accepting a project that enhances the current market value of the firm’s stock.

 

  1. D) Deciding a firm should be 100% equity financed.

 

  1. E) Delaying cash payments in order to increase the total cash on hand.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

23)          Which one of the following best illustrates the agency problem?

 

  1. A) An employee offers a suggestion which will save the company money and reduce the stress of his job.

 

  1. B) Management expands its operations overseas which is favourably received by the financial markets.
  2. C) The company creates a management bonus program whereby managers are rewarded when the market price of the firm’s stock rises.
  3. D) Management reduces the risk level of the firm while maintaining a steady stock price.
  4. E) Management rejects a merger which was desired by the shareholders.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

24)          A business created as a distinct legal entity composed of one or more individuals or entities is called a:

  1. A) Limited partnership.

 

  1. B) Sole proprietorship.

 

  1. C) General partnership.

 

  1. D)

 

  1. E) Unlimited liability company.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

22)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24)

 

 

 

 

 

 

 

 

 

8

 

25)          The management of a firm’s short-term assets and liabilities is called:

 

  1. A) Debt management.

 

  1. B) Capital structure.

 

  1. C) Capital budgeting.

 

  1. D) Working capital management.

 

  1. E) Equity management.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

26)          A general partnership is best defined as a business owned by:

 

  1. A) A single individual who desires limited liability for the firm’s debts.

 

  1. B) Two or more individuals, only one of whom has unlimited liability for the firm’s debts.

 

  1. C) One or more individuals who are each totally responsible for the debts of the entity.

 

  1. D) Two or more individuals, each of whom has limited liability for the firm’s debts.

 

  1. E) Multiple individuals, 80 percent of whom enjoy limited liability.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

27)          The best definition of “financial engineering” is:

 

  1. A) Financial markets where long-term debt and equity securities are bought and sold.

 

  1. B) The purchase or sale of securities whose value derives from the price of another, underlying, asset.

 

  1. C) A company that owns or finances income-producing real estate.

 

  1. D) Creation of new securities or financial processes.

 

  1. E) A company that owns or finances engineering projects.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

25)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

28)          Which of the following is a true statement concerning a general partnership?

 

  1. A) Partnerships have unlimited lives similar to corporations.

 

  1. B) Partnerships are taxed at the corporate level.

 

  1. C) Partners are not responsible for the debts of the partnership.

 

  1. D) The income of a partnership is taxed at the partners’ income tax rate.

 

  1. E) Partners generally do not manage the partnership.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

29)          Which one of the following correctly defines the chain of command in a typical corporate organizational structure?

  1. A) The vice president of finance reports to the chairman of the board.

 

  1. B) The treasurer reports to the chief executive officer.

 

  1. C) The chief operations officer reports to the vice president of production.

 

  1. D) The controller reports to the president.

 

  1. E) The chief executive officer reports to the board of directors.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

30)          An entity wherein one or more owners may elect to actively manage the firm while other owners choose limited liability instead of management responsibility is called a:

  1. A) General partnership.

 

  1. B)

 

  1. C) Limited liability company.

 

  1. D) Limited partnership.

 

  1. E) Limited liability corporation.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

28)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10

 

31)          Working capital management is concerned with which statement of financial position accounts?

  1. A) Long-term assets only.

 

  1. B) Current assets only.

 

  1. C) Current and long-term assets only.

 

  1. D) Current assets and current liabilities only.

 

  1. E) Current assets, long-term assets and current liabilities only.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

32)          The primary purpose of an auction market is to:

 

  1. A) Provide a market place for dealers.

 

  1. B) Offer new shares of stock to the general public.

 

  1. C) Provide electronic trading for dealers.

 

  1. D) Match buyers with sellers.

 

  1. E) Handle private placements of shares of stock.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

33)          The person generally directly responsible for overseeing the tax management, cost accounting, financial accounting, and data processing functions is the:

  1. A)

 

  1. B) Chief executive officer.

 

  1. C)

 

  1. D) Chairman of the board.

 

  1. E)

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

 

31)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

34)          The process of planning and managing a firm’s Long-term investments is called:

 

  1. A) Agency cost analysis.

 

  1. B) Capital budgeting.

 

  1. C) Capital structure.

 

  1. D) Working capital management.

 

  1. E) Financial depreciation.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

35)          Tasks related to tax management, cost accounting, financial accounting, and data processing are the responsibility of which corporate officer?

  1. A) The Corporate Controller.

 

  1. B) The Vice President of Production.

 

  1. C) The Corporate Treasurer.

 

  1. D) The Chairman of the Board.

 

  1. E) The Board of Directors.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

36)          Which type of business organization has all the respective rights and privileges of a legal person?

  1. A) General partnership.

 

  1. B)

 

  1. C) Sole proprietorship.

 

  1. D) Limited partnership.

 

  1. E) Limited liability company.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

34)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 

37)          Conflicts that arise between the interests of managers and stockholders are referred to as:

 

  1. A) Control problems.

 

  1. B) Agency problems.

 

  1. C) Proxy fights.

 

  1. D) Stockholder conflicts.

 

  1. E) Management conflicts.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

38)          Stockholders elect:

 

  1. A) The President.

 

  1. B) The Chief Executive Officer.

 

  1. C) The Chairman of the Board.

 

  1. D) All senior managers.

 

  1. E) The Corporate Directors.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

39)          Which of the following are disadvantages of the partnership form of ownership?

 

  1. A) Ease of formation and unlimited firm life.

 

  1. B) Ease of formation and ease of ownership transfer.

 

  1. C) Personal liability and limited firm life.

 

  1. D) Personal liability and double taxation.

 

  1. E) Double taxation and limited firm life.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

37)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

40)          Which of the following is a true statement concerning corporations?

 

  1. A) The life of the corporation is unlimited.

 

  1. B) The equity that can be raised by the corporation is limited to the current shareholders’ personal wealth.

 

  1. C) It is difficult to transfer ownership of corporate shares.

 

  1. D) When dividends are paid, corporate profits are taxed once.

 

  1. E) The corporation has limited liability for business debts.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

41)          Which of the following is the BEST description of the goal of the financial manager in a corporation where shares are publicly traded?

  1. A) Maximize sales.

 

  1. B) Maximize the current value per share of the existing stock.

 

  1. C) Maintain steady earnings growth.

 

  1. D) Avoid financial distress.

 

  1. E) Maximize profits.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

42)          Robert Fischer is one of the owners of a firm which generated $18,000 in taxable income last year. Robert did not have to pay any personal tax on his share of the firm’s income. Robert must be a partial owner of a:

 

  1. A) General partnership.

 

  1. B) Sole proprietorship.

 

  1. C) Non-dividend paying corporation.

 

  1. D) Limited liability company.

 

  1. E) Limited partnership.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

40)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42)

 

 

 

 

 

 

 

 

 

 

 

14

 

43)          Which of the following statements concerning NASDAQ is incorrect?

 

  1. A) NASDAQ stands for National Association of Securities Dealers Automated Quotations system.

 

  1. B) NASDAQ is an auction market.

 

  1. C) NASDAQ is an OTC market.

 

  1. D) NASDAQ is an electronic market.

 

  1. E) Most smaller firms are listed on NASDAQ rather than on the NYSE.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

44)          Which one of the following statements is correct concerning the listing of stock on an exchange?

  1. A) The TSX has the most stringent listing requirements of any Canadian stock exchange.
  2. B) Any firm can list their stock on any exchange they desire.

 

  1. C) The number of shareholders is NOT a listing consideration for a stock.

 

  1. D) All exchanges have the same listing requirements.

 

  1. E) Listing requirements are established by the Ontario Securities Commission.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

45)          Which of the following is NOT a general criterion that must be met in order for a firm to be listed on the TSX?

  1. A) The firm must have a minimum number of shares outstanding.

 

  1. B) The firm must have a minimum number of directors.

 

  1. C) The firm must have a minimum number of shareholders owning at least 300 shares.

 

  1. D) The firm must have a market value of at least $4 million.

 

  1. E) The firm must have a minimum amount of assets.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

43)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

44)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45)

 

 

 

 

 

 

 

 

 

 

 

15

 

46)          The best definition of “corporate governance” is:

 

  1. A) The manner in which shareholders agree on corporate capital structure.

 

  1. B) The actions that are deemed as socially responsible.

 

  1. C) The mechanisms and processes by which corporations are directed and controlled.

 

  1. D) The possibility of conflicts between shareholders and management in a large corporation.

 

  1. E) The process of planning and managing a firm’s long-term investments.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

47)          Stocks that trade on an exchange are referred to as:

 

  1. A) SEC stocks.

 

  1. B) Optioned stocks.

 

  1. C) Listed stocks.

 

  1. D) Primary stocks.

 

  1. E) Privately held stocks.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

48)          The total market value of the firm’s equity is determined by ________.

 

  1. A) The firm’s stakeholders.

 

  1. B) Regulatory authorities.

 

  1. C) The firm’s financial manager.

 

  1. D) The corporate treasurer.

 

  1. E) The firm’s stockholders.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

 

46)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

48)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16

 

49)          Two of the primary advantages of a sole proprietorship are the:

 

  1. A) Ability to raise capital and less regulation.

 

  1. B) Ease of company formation and limited liability.

 

  1. C) Ease of company formation and less regulation.

 

  1. D) Ease of ownership transfer and less regulation.

 

  1. E) Ease of ownership transfer and ease of company formation.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

50)          Which statement best describes hedge funds?

 

  1. A) Hedge funds are largely unregulated and privately managed investment funds catering to sophisticated investors, which look to earn high returns using aggressive financial strategies similar to mutual funds.

 

  1. B) Hedge funds are secondary market sources of raising capital for startup companies.

 

  1. C) Hedge funds are largely unregulated and privately managed investment funds catering to sophisticated investors, which look to earn high returns using aggressive financial strategies prohibited by mutual funds.

 

  1. D) Hedge funds are regulated and publicly managed investment funds catering to sophisticated investors, which look to earn high returns using aggressive financial strategies prohibited by mutual funds.

 

  1. E) Hedge funds are highly regulated and publicly managed investment funds catering to novice investors, which look to earn average returns using simple financial strategies similar to mutual funds.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

51)          The best definition of “REIT” is:

 

  1. A) Financial markets where short-term debt securities are bought and sold.

 

  1. B) Financial markets where long-term debt and equity securities are bought and sold.

 

  1. C) Financial markets where foreign currency is exchanged for real estate.

 

  1. D) A company that owns or finances income-producing real estate.

 

  1. E) Financial markets where long-term debt securities are bought and sold.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

49)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

51)

 

 

 

 

 

17

 

52)          Which of the following statements concerning auction markets is correct?

 

  1. A) A market where buyers specify the lowest price they are willing to pay and sellers indicate the highest price they are willing to accept.

 

  1. B) The TSX is an auction market.

 

  1. C) NASDAQ is an auction market.

 

  1. D) An auction market is called an over-the-counter market.

 

  1. E) All trades involve a dealer in an auction market.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

53)          Which of the following does NOT correctly finish this sentence: In Canada, ________.

 

  1. A) Financial markets function as both primary and secondary markets for debt and equity securities.

 

  1. B) The OTC market does not have a central location.

 

  1. C) New issues of securities occur in primary markets.

 

  1. D) Auction markets have a physical location.

 

  1. E) Over-the-counter markets are operated as auction markets.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

54)          Which of the following is incorrect regarding employee stock options?

 

  1. A) It allows management to purchase shares at a fixed price over a period of time.

 

  1. B) It provides the manager with an ownership stake in the company.

 

  1. C) Many believe management are already overpaid.

 

  1. D) Many believe management are underpaid and stock options will benefit pay.

 

  1. E) Options are meant to align the manager’s and actions with shareholders’ interests.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

52)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

53)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18

 

55)          A(n) ________ is a sale of securities which typically does not require registration with the OSC.

  1. A) Initial public offering.

 

  1. B) Over-the-counter transaction.

 

  1. C) Secondary market transaction.

 

  1. D) Private placement.

 

  1. E) Primary market transaction.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

56)          Which one of the following is a capital budgeting decision?

 

  1. A) Deciding when to repay a long-term debt.

 

  1. B) Determining how much money should be kept in the chequing account.

 

  1. C) Deciding whether or not to open a new store.

 

  1. D) Determining how much inventory to keep on hand.

 

  1. E) Determining how much debt should be borrowed from a particular lender.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

57)          Managers who place the interest of the shareholders first, will tend to:

 

  1. A) Reward employees for unethical behaviour if that behaviour increases the firm’s net income.

 

  1. B) Be in greater demand and receive higher compensation.

 

  1. C) Decline all offers to buy the firm.

 

  1. D) Realize minimal value from the stock options they are granted.

 

  1. E) Be replaced on a routine basis.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

55)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

56)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

57)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19

 

58)          A business formed by two or more individuals who each have unlimited liability for business debts is called a:

  1. A) Limited liability company.

 

  1. B) General partnership.

 

  1. C)

 

  1. D) Limited partnership.

 

  1. E) Sole proprietorship.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

59)          Which one of the following groups is the goal of financial management centered around?

 

  1. A) Existing management.

 

  1. B) Current creditors.

 

  1. C) The CRA.

 

  1. D) Potential new shareholders.

 

  1. E) Existing shareholders.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

60)          The size, risk, and timing of future cash flows are the key elements evaluated in the:

 

  1. A) Cash management process.

 

  1. B) Capital budgeting process.

 

  1. C) Analysis of current assets.

 

  1. D) Analysis of working capital.

 

  1. E) Capital structure decision.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

58)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

59)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

60)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

61)          The rules by which corporations govern themselves are called:

 

  1. A) Indemnity provisions.

 

  1. B) Indenture provisions.

 

  1. C) Partnership agreements.

 

  1. D)

 

  1. E) Articles of incorporation.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

62)          Which form of business structure faces the greatest agency problems?

 

  1. A) Sole proprietorship.

 

  1. B)

 

  1. C) Limited partnership.

 

  1. D) General partnership.

 

  1. E) Limited liability company.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

63)          Which of the following markets is considered a dealer market?

 

  1. A) New York Stock Exchange.

 

  1. B) The over-the-counter (OTC) Market.

 

  1. C) The real estate market.

 

  1. D) The Toronto Stock Exchange.

 

  1. E) The Ontario Securities Commission.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

61)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

62)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

63)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

 

64)          Which of the following is a capital structure decision?

 

  1. A) Cost of acquiring funds for the company.

 

  1. B) Management of current assets and liabilities.

 

  1. C) Which projects should be accepted or rejected.

 

  1. D) Management of net working capital.

 

  1. E) Timing and risks of cash flows for an upcoming project.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

65)          Which one of the following questions would most likely be the responsibility of the financial manager?

  1. A) What price should be charged for a new product?

 

  1. B) Where should a new store be located?

 

  1. C) Which product markets should be expanded?

 

  1. D) Which employees should work overtime?

 

  1. E) How should the firm finance a new distribution center?

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

66)          The death of the firm’s owner(s) does NOT effectively dissolve which type(s) of organization?

  1. A)

 

  1. B) Limited proprietorship.

 

  1. C) Sole proprietorship.

 

  1. D)

 

  1. E) Hybrid partnership.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

64)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

66)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22

 

67)          In a general partnership:

 

  1. A) None of the partners are personally liable for the firm’s debt.

 

  1. B) Each partner is personally responsible for all of the firm’s debt.

 

  1. C) Only the general partner is liable for the firm’s debt.

 

  1. D) Each partner is responsible only for his/her portion of the firm’s debt based on ownership percentage.

 

  1. E) Each partner is liable only for the portion of the total debt he/she agreed in writing to pay.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

68)          The primary purpose of capital budgeting is to:

 

  1. A) Estimate the initial cost of a project.

 

  1. B) Determine the risk level of a project.

 

  1. C) Identify projects that produce cash flows that exceed the cost of the project.

 

  1. D) Distinguish projects that have at least a five-year life from those that don’t.

 

  1. E) Determine the amount of cash and inventory to keep on hand.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

69)          Which one of the following statements is correct?

 

  1. A) Both partnerships and corporations incur double taxation.

 

  1. B) Both partnerships and corporations have bylaws.

 

  1. C) Both sole proprietorships and partnerships are taxed in a similar fashion.

 

  1. D) All types of business formations have limited lives.

 

  1. E) Partnerships are the most complicated type of business to form.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

67)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

68)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

69)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23

 

70)          Ensuring that a firm has sufficient cash available on a daily basis is part of:

 

  1. A) Business organization.

 

  1. B) Working capital management.

 

  1. C) Capital structure.

 

  1. D) Capital budgeting.

 

  1. E) Organizational structure.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

71)          Which of the following statements concerning auction markets is false?

 

  1. A) A market where buyers specify the highest price they are willing to pay and sellers indicate the lowest price they are willing to accept.

 

  1. B) The NYSE is an auction market.

 

  1. C) Auction markets have a physical location.

 

  1. D) The OTC is an auction market.

 

  1. E) The TSX is an auction market.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

72)          The original sale of securities by governments and corporations occurs in the:

 

  1. A) Primary market.

 

  1. B) Auction market.

 

  1. C) Liquidation market.

 

  1. D) Secondary market.

 

  1. E) Dealer market.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

70)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

71)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

72)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24

 

73)          A financial manager of a corporation is considering different operating strategies for the coming year. From a financial management standpoint, which of the following would be her optimal strategy?

 

  1. A) Undertake the plan that would result in the largest profits for the year.

 

  1. B) Undertake the plan that would lead to the most stable stock price for the year.

 

  1. C) Undertake the plan that would maximize the current stock price.

 

  1. D) Undertake the plan that would reduce the overall riskiness of the firm.

 

  1. E) Undertake the plan that would maximize her personal wealth.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

74)          When one shareholder sells stock directly to another, the transaction is said to occur in the:

  1. A) OTC market.

 

  1. B) Primary market.

 

  1. C) TSX market.

 

  1. D) Secondary market.

 

  1. E) Dealer market.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

75)          Which of the following does not assist in ensuring managers act in the best interest of owners?

  1. A) There is a high degree of likelihood the firm will become a takeover candidate if the firm performs poorly.
  2. B) The threat that if the firm does poorly, shareholders will use a proxy fight to replace the existing management.
  3. C) A compensation package for managers that ties their salary to the firm’s share price.

 

  1. D) A compensation package for managers that is all cash with no ties to performance.

 

  1. E) Managers are promoted only if the firm prospers.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

73)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

74)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

75)

 

 

 

 

 

 

 

 

25

 

76)          A proprietorship is:

 

  1. A) A business owned by an individual who has unlimited personal liability.

 

  1. B) A separate legal body formed by an individual who has limited personal liability.

 

  1. C) A limited liability form of business ownership.

 

  1. D) A business formed by two or more individuals.

 

  1. E) A business managed by a single general partner.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

77)          Which one of the following statements is correct concerning corporations?

 

  1. A) The majority of firms are corporations.

 

  1. B) The ability of a corporation to raise capital is quite limited.

 

  1. C) The income of a corporation is taxed as personal income of the stockholders

 

  1. D) The largest firms are usually corporations.

 

  1. E) The stockholders are usually the managers of a corporation.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

78)          The decisions made by financial managers should all be ones which increase the:

 

  1. A) Market value of the existing owners’ equity.

 

  1. B) Marketability of the managers.

 

  1. C) Growth rate of the firm.

 

  1. D) Size of the firm.

 

  1. E) Financial distress of the firm.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

76)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

77)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

78)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26

 

79)          Luis has just decided that his firm should obtain $10 million in bank financing from the Atlantic Bank and Trust and should issue $25 million in new equity shares. Luis has just made a(n) ________ decision.

 

  1. A) Marketing

 

  1. B) Capital budgeting

 

  1. C) Operational

 

  1. D) Working capital

 

  1. E) Capital structure

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

80)          The Treasurer:

 

  1. A) Must file quarterly financial statements in a timely manner.

 

  1. B) Reports directly to the Chief Executive Officer of a corporation.

 

  1. C) Is responsible for overseeing the data processing functions within a firm.

 

  1. D) Must keep current on tax laws since he/she is responsible for managing the taxes for a firm.

 

  1. E) Has the responsibility for managing the cash for an organization.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

81)          Which one of the following statements is true concerning stock exchanges?

 

  1. A) NASDAQ listed stocks trade more actively than those listed on the NYSE.

 

  1. B) The Toronto Stock Exchange is the largest exchange in the world.

 

  1. C) The OTC market is physically located in Toronto.

 

  1. D) The Tokyo Stock Exchange is not a very actively traded upon exchange.

 

  1. E) The total value of NASDAQ listed stocks is less than the total value of NYSE listed stocks.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

 

79)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

80)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

81)

 

 

 

 

 

 

 

 

 

 

 

27

 

82)          Which of the following is a disadvantage of the corporate form of ownership?

 

  1. A) The life of the corporation.

 

  1. B) Ease of transfer of ownership.

 

  1. C) Limited liability.

 

  1. D)

 

  1. E) Ability to raise capital.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

83)          The primary market includes:

 

  1. A) The sale of stock by a shareholder in the open market.

 

  1. B) The purchase and sale of shares of stock between two shareholders.

 

  1. C) The sale of stock by a shareholder in the OTC market.

 

  1. D) The sale of new securities by a corporation for the first time to the general public.

 

  1. E) The sale of stock by a shareholder in an auction market.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

84)          To avoid the agency problem, managers should take actions:

 

  1. A) Which adds value to the firm.

 

  1. B) Only if they increase the market share of the firm.

 

  1. C) Only after the president has approved them.

 

  1. D) Which add to the size of the firm’s workforce.

 

  1. E) Only if management jobs will not be jeopardized.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

82)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

83)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

84)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28

 

85)          The treasurer and the controller of a corporation generally report to the:

 

  1. A) Chairman of the board.

 

  1. B) Chief executive officer.

 

  1. C) Vice president of finance.

 

  1. D) Board of directors.

 

  1. E)

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

86)          What strategies do hedge funds employ to earn their returns?

 

  1. A) Their strategies may include indexing the returns of major stock exchanges in North America.

 

  1. B) Their strategies may include arbitrage, high levels of leverage, and active involvement in the derivatives market.
  2. C) Their strategies may include indexing the returns of stock and bond markets in North America.
  3. D) Their strategies include indexing the returns of risk-free returns such as North American government bonds.
  4. E) Their strategies may include indexing the returns of North American mutual funds.

 

 

85)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

86)

 

 

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

87) Which of the following is NOT a capital budgeting decision?  87)

  1. A) The currency and exchange rates of cash inflows and outflows.

 

  1. B) The amount of cash flows which will be required or obtained.

 

  1. C) The amount of debt versus the amount of equity which should be obtained.

 

  1. D) The timing of all cash inflows and outflows.

 

  1. E) The risk associated with the expected cash inflows.

 

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

 

 

 

 

 

 

 

 

29

 

88)          Working capital management:

 

  1. A) Concerned with having sufficient funds to operate the business on a daily basis.

 

  1. B) Balances the amount of company debt to the amount of available equity.

 

  1. C) Ensures that long-term debt is acquired at the lowest possible cost.

 

  1. D) Ensures that sufficient equipment is available to produce the amount of product desired on a daily basis.

 

  1. E) Ensures that dividends are paid to all stockholders on an annual basis.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

89)          The triple bottom line measures:

 

  1. A) A company’s performance within the primary, secondary and tertiary markets.

 

  1. B) A company’s economic, social and environmental performance.

 

  1. C) A company’s performance against the top three competitors in the market.

 

  1. D) A company’s performance within its three financial statements.

 

  1. E) A company’s performance of its revenues, gross profit and net income against its annual strategic plan.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

90)          Which one of the following is a correct statement concerning a sole proprietorship?

 

  1. A) A sole proprietorship is more highly regulated than a corporation.

 

  1. B) A sole proprietorship is relatively difficult to form.

 

  1. C) It may be difficult to transfer the ownership of a sole proprietorship.

 

  1. D) The profits earned by a sole proprietorship are subject to double taxation.

 

  1. E) The losses incurred by a sole proprietor are limited to the amount invested in the firm.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

88)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

89)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90)

 

 

 

 

 

 

 

 

 

 

 

 

30

 

91)          Which of the following are advantages of the corporate form of ownership?

 

  1. A) Ease of ownership transfer and simplicity of company formation.

 

  1. B) Limited personal liability and ability to raise capital.

 

  1. C) Limited personal liability and limited firm life.

 

  1. D) Simplicity of company formation and the ability to raise capital.

 

  1. E) Ability to raise capital and limited firm life.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

92)          The best definition of “derivative securities” is:

 

  1. A) An insurance policy that ensures underlying assets are secured.

 

  1. B) Creation of new securities or financial processes.

 

  1. C) Investment products whose value derives from the price of another, underlying, asset.

 

  1. D) A compensation package for managers that ties their salary to the firm’s share price.

 

  1. E) Financial markets where long-term debt and equity securities are bought and sold.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

93)          The purchase and sale of securities after the original issuance occurs in the:

 

  1. A) Primary market.

 

  1. B) Liquidation market.

 

  1. C) Secondary market.

 

  1. D) Dealer market.

 

  1. E) Auction market.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

91)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

92)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

93)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31

 

94)          A business formed by two or more individuals or entities is called a(n):

 

  1. A) Sole proprietorship.

 

  1. B) Closed receivership.

 

  1. C)

 

  1. D) Open structure.

 

  1. E)

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

95)          Which one of the following actions by a financial manager is most aligned with the goal of financial management?

  1. A) Increasing the bonuses paid to the top executives as the size of the firm increases.

 

  1. B) Increasing the size of a firm by acquiring a non-profitable competitor.

 

  1. C) Improving the efficiency of the company such that the value of the stock increases.

 

  1. D) Issuing additional shares of stock to repay all of the firm’s long-term debt.

 

  1. E) Increasing the sales of the firm by expanding the company’s sales force.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

96)          Which of the following is an advantage of ownership of a corporation compared to that of a sole proprietorship?

  1. A) Dividends received by the corporation’s shareholders are tax-exempt.

 

  1. B) The owners of the corporation have unlimited liability for the firm’s debts.

 

  1. C) It is the simplest to start.

 

  1. D) It is more difficult to transfer ownership in a corporation.

 

  1. E) The corporation has an unlimited life.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

 

94)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

95)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

96)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 

97)          Deciding whether or not to open a new store is part of the process known as:

 

  1. A) Capital budgeting.

 

  1. B) Working capital management.

 

  1. C) Capital structure.

 

  1. D) Cash management.

 

  1. E) Credit management.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

98)          What is the difference between third and fourth markets?

 

  1. A) A third market involves trading in corporate equities, while a fourth market involves trading in corporate debt.

 

  1. B) A third market involves trading in call options, while a fourth market involves trading in warrants.
  2. C) A third market involves trading institution-to-institution trading without using the services of brokers or dealers trading, while a fourth market involves trading exchange-listed securities in OTC markets.
  3. D) A third market involves trading in corporate debt, while a fourth market involves trading in corporate equities.
  4. E) A third market involves trading exchange-listed securities in OTC markets, while a fourth market trading involves institution-to-institution trading without using the services of brokers or dealers.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

99)          Which one of the following statements concerning a proprietorship is true?

 

  1. A) A partial transfer of ownership is easier with a proprietorship than with a corporation.

 

  1. B) Income from a proprietorship is taxed at a lower rate than other personal income.

 

  1. C) A proprietorship can be a business jointly owned by two family members.

 

  1. D) A proprietor is personally responsible for 100% of the firm’s liabilities.

 

  1. E) Income from a proprietorship is taxed as a separate entity.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

97)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

98)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

99)

 

 

 

 

 

33

 

100)       Which one of the following is a capital budgeting decision?

 

  1. A) Determining which bank has the best loan terms.

 

  1. B) Evaluating the minimal amount of cash which the firm should keep on hand.

 

  1. C) Deciding whether or not the firm should open another retail outlet.

 

  1. D) Establishing the length of time for which store credit will be offered.

 

  1. E) Ascertaining the optimal level of inventory.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

101)       Working capital management refers specifically to:

 

  1. A) The daily use of a firm’s fixed assets to generate revenue.

 

  1. B) The management of a firm’s Loan accounts from financial institutions.

 

  1. C) Obtaining the necessary funds to finance a firm’s long term activities.

 

  1. D) The utilization of a firm’s assets on a daily basis.

 

  1. E) The oversight of a firm’s current accounts.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

102)       An individual who buys and sells stocks for his/her own account is a:

 

  1. A)

 

  1. B) OTC broker.

 

  1. C)

 

  1. D)

 

  1. E)

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

100)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

101)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

102)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34

 

103)       A business owned by a single individual is called a(n):

 

  1. A)

 

  1. B) Open structure.

 

  1. C) Sole proprietorship.

 

  1. D)

 

  1. E) Closed receivership.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

104)       Of the following, which statement regarding agency costs is false?

 

  1. A) An agency problem exists when there is a conflict of interest between the stockholders and management of a firm.

 

  1. B) An indirect agency cost occurs when firm management avoids risky projects that would favourably affect the stock price because the managers are worried about keeping their jobs.
  2. C) An agency problem exists when there is a conflict of interest between a principal and an agent.
  3. D) If agency costs get too high in the eyes of shareholders, they can begin a proxy fight to replace existing management.
  4. E) A corporate expenditure that benefits stockholders but harms management is an agency cost.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

105)       The best definition of “regulatory dialectic” is:

 

  1. A) The pressures financial institutions exert on corporations.

 

  1. B) The pressures financial institutions and regulatory bodies exert on each other.

 

  1. C) The pressures regulatory bodies exert on investors.

 

  1. D) The pressures regulatory bodies exert on corporations.

 

  1. E) The pressures government exerts on regulatory bodies.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

103)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

104)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

105)

 

 

 

 

 

 

 

 

35

 

106)       The area of corporate finance concerned purchasing and selling stocks and bonds is called:

  1. A) Municipal finance.

 

  1. B) International finance.

 

  1. C)

 

  1. D) Institutional finance.

 

  1. E) Strategic finance.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

107)       Double taxation refers to which of the following scenarios?

 

  1. A) The corporation pays taxes on revenues and expenses.

 

  1. B) Both bondholders and shareholders must pay taxes.

 

  1. C) The corporation pays taxes on revenues and earnings.

 

  1. D) The corporation pays taxes on earnings, and creditors pay taxes on interest received.

 

  1. E) The corporation pays taxes on its earnings, and shareholders pay taxes on dividends.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

108)       It is easiest to raise capital for a project under which form of business organization?

 

  1. A) General partnership.

 

  1. B) Limited partnership.

 

  1. C)

 

  1. D) Sole proprietorship.

 

  1. E) The form of business organization does NOT affect the ability to raise capital.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

106)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

107)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

108)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36

 

109)       Working capital management:

 

  1. A) Includes the daily oversight of a firm’s cash requirements.

 

  1. B) Is the oversight of a firm’s long-term assets.

 

  1. C) Deals with the refinancing of the firm’s debt if interest rates decline.

 

  1. D) Involves the determination of how much long-term debt should be issued.

 

  1. E) Deals with the allocation of equipment to various jobs on a daily basis.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

110)       Mr. Webster, the CEO of Master Works, Inc., recently stated that the firm will maintain its current policy of borrowing $.40 for every $1 invested by shareholders. Mr. Webster was referring to the ________ policy of the firm.

 

  1. A) Financial planning.

 

  1. B) Capital budgeting.

 

  1. C) Capital investment.

 

  1. D) Working capital.

 

  1. E) Capital structure.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

111)       The agency problem is best defined as a conflict of interest between a firm’s:

 

  1. A) Various managers.

 

  1. B) Various employees.

 

  1. C) Managers and the firm’s employees.

 

  1. D) Stockholders and the firm’s debtors.

 

  1. E) Stockholders and the firm’s managers.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

 

109)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

110)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

111)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37

 

112)       A sole proprietorship is best defined as a business owned by:

 

  1. A) Individuals who enjoy limited liability.

 

  1. B) A single individual who has limited liability for the firm’s debts.

 

  1. C) One or more individuals who have agreed to accept unlimited liability for the firm.

 

  1. D) An individual for less than ten years.

 

  1. E) A single individual who has unlimited liability for the firm’s debts.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

113)       When considering a capital budgeting project the financial manager should consider:

 

  1. A) Only the timing of the project cash flows.

 

  1. B) Only the size of the project.

 

  1. C) The size, timing, and risk of the project cash flows.

 

  1. D) Only the size and timing of the project cash flows.

 

  1. E) Only the risk of the project cash flows.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

114)       The decision to issue debt rather than additional shares of stock is an example of:

 

  1. A) Capital budgeting.

 

  1. B) Working capital management.

 

  1. C) Capital structure decision.

 

  1. D) A controller’s duties.

 

  1. E) A net working capital decision.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

112)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

113)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

114)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38

 

115)       The secondary market is the market wherein:

 

  1. A) The security issuer is the buyer and the seller is a member of the general public.

 

  1. B) One issuer exchanges securities directly with another issuer.

 

  1. C) The security issuer is the seller and the buyer is a member of the general public.

 

  1. D) Shareholders buy from and sell to other shareholders.

 

  1. E) The government is either the buyer or the seller of the security.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

116)       An individual who places an order to buy 1000 shares of IBM stock:

 

  1. A) Is most likely participating in the secondary market.

 

  1. B) Is involved in a private placement of securities.

 

  1. C) Has to be listed as a private dealer.

 

  1. D) Is most likely involved in an IPO.

 

  1. E) Must have hired a dealer to perform this transaction.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

117)       The bylaws:

 

  1. A) Set forth the purpose of the firm.

 

  1. B) Set forth the procedure by which the stockholders elect the senior managers of the firm.

 

  1. C) Establish the name of the corporation.

 

  1. D) Mandate the procedure for electing corporate directors.

 

  1. E) Are rules which apply only to limited liability companies.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

115)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

116)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

117)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39

 

118)       Working capital management refers to:

 

  1. A) The amount of Long-term debt.

 

  1. B) The levels of cash and inventory held.

 

  1. C) The types of stock issued.

 

  1. D) The mixture of debt and equity.

 

  1. E) The types of Long-term investments made.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

119)       The corporate document that sets forth the business purpose of a firm is the:

 

  1. A) Articles of incorporation.

 

  1. B) Corporate bylaws.

 

  1. C) Provincial tax agreement.

 

  1. D) Indenture contract.

 

  1. E) Corporate charter.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

120)       A market where trading takes place between buyers and sellers directly is called a(n):

 

  1. A) Liquidation market.

 

  1. B) Primary market.

 

  1. C) Dealer market.

 

  1. D) Auction market.

 

  1. E) Secondary market.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

118)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

119)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

120)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40

 

121)       A dealer is a person who:

 

  1. A) Conducts a trade on behalf of another individual.

 

  1. B) Buys and sells but does not own the commodity being bought or sold.

 

  1. C) Buys and sells strictly on the trading floor of an exchange.

 

  1. D) Buys and sells for themselves, at their own risk.

 

  1. E) Buys and sells on behalf of the original issuer of the commodity being bought or sold.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

122)       The management of the firm’s short-term assets and liabilities is called:

 

  1. A) Capital budgeting.

 

  1. B) Agency cost analysis.

 

  1. C) Financial depreciation.

 

  1. D) Working capital management.

 

  1. E) Capital structure.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

123)       Which of the following statement is correct regarding control of the firm?

 

  1. A) Control of the firm rests with government agencies and regulatory bodies working in unison with the board of directors.

 

  1. B) Control of the firm rests with regulatory bodies working in unison with executives.

 

  1. C) Control of the firm ultimately rests with shareholders. They elect the board of directors, who, in turn, hire and fire management.

 

  1. D) Control of the firm ultimately rests with board of directors. They elect the management, who, in turn, lead the company.
  2. E) Control of the firm rests with the executives that oversea the strategic planning.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

121)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

122)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

123)

 

 

 

 

 

 

 

 

 

 

 

41

 

124)       A business that is a distinct legal entity is a:

 

  1. A) Partnership with only two partners.

 

  1. B) Limited partnership.

 

  1. C)

 

  1. D) General partnership.

 

  1. E)

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

125)       The secondary market is:

 

  1. A) The market in which purchasers are matched with those who wish to sell.

 

  1. B) The market in which dealers buy and sell for themselves, at their own risk.

 

  1. C) The market in which securities are bought and sold after original sale.

 

  1. D) The market for the original sale of securities by governments and corporations.

 

  1. E) A market which has no central Location.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

126)       Which of the following is considered a primary market transaction?

 

  1. A) On September 25, 1995, 30.8 million shares of stock changed hands on the TSX.

 

  1. B) An investor buys stock in Chrysler Canada from his buddy.

 

  1. C) Labatt’s just announced what their upcoming quarterly dividend payment will be.

 

  1. D) A firm sells stock to the public for the first time in an IPO.

 

  1. E) Chrysler Canada’s stockholders sell some of their shares to an activist investor.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

124)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

125)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

126)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42

 

127)       Sue Folker wants to start a new business decommissioning nuclear warheads and reactors. The work will involve significant hazards, and Sue is concerned about protecting her personal wealth from any losses the business might incur. If she is to be the majority owner of the business how should she structure it?

 

  1. A) As a real estate investment trust.

 

  1. B) As a limited partnership.

 

  1. C) As a general partnership.

 

  1. D) As a corporation.

 

  1. E) As a sole proprietorship.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

128)       Which of the following is considered a benefit of the corporate form of organization?

 

  1. A) Ease of the transfer of ownership.

 

  1. B) Ease of entry into stock exchange.

 

  1. C) Limited life.

 

  1. D) Double taxation.

 

  1. E) Ease of reporting.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

129)       A business created as a distinct legal entity composed of one or more individuals or entities is called a(n):

  1. A)

 

  1. B) Open structure.

 

  1. C) Sole proprietorship.

 

  1. D)

 

  1. E) Closed receivership.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

127)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

128)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

129)

 

 

 

 

 

 

 

 

 

 

 

43

 

130)       Which one of the following actions by a financial manager creates an agency problem?

 

  1. A) Agreeing to pay bonuses based on the market value of the company stock.

 

  1. B) Refusing to borrow money when doing so will create losses for the firm.

 

  1. C) Refusing to lower selling prices if doing so will reduce the net profits.

 

  1. D) Increasing current costs in order to increase the market value of the stockholders’ equity.

 

  1. E) Agreeing to expand the company at the expense of stockholders’ value.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

131)       Which one of the following statements concerning a partnership is true?

 

  1. A) A partnership terminates at the death of any partner.

 

  1. B) Limited partners in a limited partnership should be actively involved in management decisions.

 

  1. C) Income from a limited partnership is taxed as corporate income.

 

  1. D) A primary advantage of a partnership is the ease of transferring ownership.

 

  1. E) Under a general partnership, only the key partner is personally liable for the business debts.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

132)       The treasurer of a firm is most apt to report to the:

 

  1. A)

 

  1. B)

 

  1. C) Chief executive officer.

 

  1. D) Chief operating officer.

 

  1. E) Vice president of finance.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

 

130)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

131)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

132)

 

 

 

 

 

 

 

 

 

 

 

 

44

 

133)       The ultimate responsibility for a corporation rests with:

 

  1. A) The Board of Directors.

 

  1. B) The Chief Operations Officer.

 

  1. C) The stockholders.

 

  1. D) The stakeholders.

 

  1. E) The Chairman of the Board.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

134)       The document that legally establishes domicile for a corporation is called the:

 

  1. A) Partnership agreement.

 

  1. B)

 

  1. C) Amended homestead filing.

 

  1. D) Articles of incorporation.

 

  1. E) Indenture contract.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

135)       The term “capital structure” describes:

 

  1. A) The mix of preferred stock and common stock that makes up the equity account of a firm.

 

  1. B) The mixture of short-term liabilities a firm uses to finance its short-term assets.

 

  1. C) The mixture of debt and equity a firm uses to finance its operations.

 

  1. D) The firm’s short-term assets and short-term liabilities.

 

  1. E) The mixture of long-term investments a firm has made.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

133)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

134)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

135)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45

 

136)       Which of the following is NOT a Canadian financial institution?

 

  1. A) Investment dealers.

 

  1. B) Mutual funds.

 

  1. C) Provincial governments.

 

  1. D) Chartered banks.

 

  1. E) Trust companies.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

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

  1. A) General partnership.

 

  1. B) Limited partnership.

 

  1. C) Sole proprietorship.

 

  1. D) Limited liability company.

 

  1. E)

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

138)       The best definition of “capital budgeting” is:

 

  1. A) Financial markets where long-term debt and equity securities are bought and sold.

 

  1. B) The process of planning and managing a firm’s long-term investments.

 

  1. C) The possibility of conflicts between shareholders and management in a large corporation.

 

  1. D) The annual process of providing a benchmark for financial performance.

 

  1. E) The purchase or sale of securities whose value derives from the price of another, underlying, asset.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

136)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

137)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

138)

 

 

 

 

 

 

 

 

 

 

 

 

46

 

139)       The mix of debt and equity by which a corporation is financed refers to the firm’s:

 

  1. A) Cash management.

 

  1. B) Capital structure.

 

  1. C) Capital budgeting.

 

  1. D) Leverage management.

 

  1. E) Working capital management.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

140)       Which one of the following is a disadvantage of a partnership?

 

  1. A) Growth limitations due to the inability to raise investment capital.

 

  1. B) The debt obligations of a limited partner.

 

  1. C) Double taxation.

 

  1. D) Ability to raise capital as compared to a sole proprietorship.

 

  1. E) Complexity and cost of partnership formation.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

141)       Which one of the following means of management compensation is designed to help eliminate the agency problem?

  1. A) Providing cost of living adjustments.

 

  1. B) Providing annual raises.

 

  1. C) Providing a corporate jet.

 

  1. D) Offering stock options.

 

  1. E) Increasing health care benefits.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

139)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

140)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

141)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

47

 

142)       Which of the following is NOT a capital budgeting question?

 

  1. A) The percentage return obtained by putting long-term assets to use.

 

  1. B) Credit policy to provide.

 

  1. C) What type of business a firm wants to operate.

 

  1. D) The choice of which long-term assets to purchase.

 

  1. E) The dollar obtained by putting long-term assets to use.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

143)       The process of planning and managing a firm’s long-term investments is called:

 

  1. A) Financial depreciation.

 

  1. B) Capital structure.

 

  1. C) Agency cost analysis.

 

  1. D) Capital budgeting.

 

  1. E) Working capital management.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

144)       Bylaws are:

 

  1. A) The documents which set forth the business purpose of a firm.

 

  1. B) The rules by which corporations govern themselves.

 

  1. C) The agreements specifying which partners are general partners and which are limited partners.

 

  1. D) The documents which specify how tax liabilities will be allocated among the owners.
  2. E) The terms by which partnership profits are distributed.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

142)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

143)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

144)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

48

 

145)       A firm’s capital structure is defined:

 

  1. A) As the amount of fixed assets needed to support every $1 in sales.

 

  1. B) As the mix of short-term and Long-term assets owned by the firm.

 

  1. C) By the types of fixed assets the firm owns.

 

  1. D) By the nature of the product or service provided.

 

  1. E) As the combination of debt and equity used to finance the firm’s operations.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

146)       Margie has just been promoted to the position of working capital manager. As part of her duties, Margie will be responsible for:

  1. A) Pricing manufactured goods.

 

  1. B) Overseeing accounts payable.

 

  1. C) Managing long-term debt.

 

  1. D) Allocating manufacturing overhead.

 

  1. E) Controlling labour costs.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

147)       Agency costs are:

 

  1. A) Corporate income subject to double taxation.

 

  1. B) The costs of the conflict of interest between stockholders and management.

 

  1. C) The total interest paid to creditors over the lifetime of the firm.

 

  1. D) The total dividends paid to shareholders over the lifetime of the firm.

 

  1. E) The costs that result from default and bankruptcy of the firm.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

145)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

146)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

147)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49

 

148)       A market where trading takes place directly between buyers and sellers is called a(n):

 

  1. A) OTC market.

 

  1. B) Liquidation market.

 

  1. C) Auction market.

 

  1. D) Primary market.

 

  1. E) Dealer market.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

149)       The purchase and sale of shares between investors are done in which market?

 

  1. A) Derivatives market.

 

  1. B) Debt market.

 

  1. C) Foreign exchange market.

 

  1. D) Tertiary market.

 

  1. E) Secondary market.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

150)       Which of the following statements concerning dealers is false?

 

  1. A) Most debt securities trade in dealer markets.

 

  1. B) The TSX and NYSE are dealer markets.

 

  1. C) Dealers usually buy and sell only for themselves.

 

  1. D) The OTC market is a dealer market.

 

  1. E) Dealers accept the risks of owning shares of stock.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

148)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

149)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

150)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50

 

151)       The division of profits and losses between the members of a partnership is formalized in the:

  1. A) Statement of purpose.

 

  1. B) Partnership agreement.

 

  1. C) Indemnity clause.

 

  1. D) Indenture contract.

 

  1. E) Group charter.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

152)       The mixture of debt and equity used by a firm to finance its operations is called:

 

  1. A) Cost analysis.

 

  1. B) Working capital management.

 

  1. C) Capital budgeting.

 

  1. D) Financial depreciation.

 

  1. E) Capital structure.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

153)       When a corporation issues additional shares of common stock to the general public, they do so:

  1. A) In the primary market.

 

  1. B) Through a broker in the secondary market.

 

  1. C) Only through the private markets.

 

  1. D) Only through the OTC market.

 

  1. E) Through a dealer in the secondary market.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

151)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

152)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

153)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

51

 

154)       Which one of the following is a primary market transaction?

 

  1. A) A dealer buying newly issued shares of stock from a corporation.

 

  1. B) A dealer selling shares of stock to an individual investor.

 

  1. C) A sole proprietor buying shares of stock from an individual investor.

 

  1. D) An individual investor selling shares of stock to another individual.

 

  1. E) A bank selling shares of a medical firm to an individual.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

155)       Which of the following would be considered a secondary market transaction?

 

  1. A) Buy or sell orders only for call or put options.

 

  1. B) Buy or sell orders for shares listed on the TSX or corporate bonds.

 

  1. C) Buy or sell orders to a broker for shares listed on the TSX.

 

  1. D) Buy or sell orders only for corporate bonds.

 

  1. E) Buy or sell orders for corporate warrants.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

156)       On a typical day in Canada, the largest dollar volume of shares are traded ________.

 

  1. A) On the NYSE.

 

  1. B) On the Venture Exchange.

 

  1. C) Over the counter.

 

  1. D) In primary markets.

 

  1. E) On the TSX.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

 

154)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

155)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

156)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

52

 

157)       The controller can be defined as the person who is generally responsible for overseeing the ________ of a firm.

  1. A) Capital expenditures.

 

  1. B) Financial planning.

 

  1. C) Cash balances.

 

  1. D) Accounting functions.

 

  1. E) Production functions.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

158)       NASDAQ is:

 

  1. A) A market with far fewer listings than the NYSE.

 

  1. B) An electronic market trading solely in corporate and government bonds.

 

  1. C) An electronic market which has no physical location.

 

  1. D) The largest financial market in the U.S. in terms of the total value of listed stocks.

 

  1. E) Both an OTC and an auction market.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

159)       Which of the following would be considered a primary market transaction?

 

  1. A) A buy order to a broker for shares of a company on the Venture Exchange.

 

  1. B) A buy order to a dealer for shares of a company OTC.

 

  1. C) A buy order to an investment banker for a new public stock offering.

 

  1. D) A sell order to a broker for a stock listed on the TSX.

 

  1. E) A buy order to a broker for shares of a company on the TSX.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

157)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

158)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

159)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

53

 

160)       The decision of which lender to use and which type of long-term loan is best for a project is part of:

  1. A) The net working capital decision.

 

  1. B) Working capital management.

 

  1. C) The capital structure decision.

 

  1. D) Capital budgeting.

 

  1. E) A controller’s duties.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

161)       A market where dealers buy and sell securities for themselves, at their own risk, is called a(n):

  1. A) Liquidation market.

 

  1. B) Auction market.

 

  1. C) Dealer market.

 

  1. D) Secondary market.

 

  1. E) Primary market.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

162)       Which of the following is NOT a duty of a financial manager?”

 

  1. A) Deciding on the optimal product mix to sell.

 

  1. B) Deciding how much short-term debt to use.

 

  1. C) Deciding the mix of long-term debt and equity.

 

  1. D) Deciding which projects a firm should undertake.

 

  1. E) Deciding how much interest to pay the holders of the corporation’s bonds.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

160)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

161)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

162)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54

 

163)       Which of the following is considered a “primary market” transaction?

 

  1. A) You purchase call options issued by Ford Motor Company.

 

  1. B) You purchase warrants issued by General Motors Corporation.

 

  1. C) You buy shares in Apple from an online brokerage

 

  1. D) You buy shares in the public offering of a start-up company in the computer industry.

 

  1. E) Your mother sells you the shares she purchased in your uncle’s latest business venture.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

164)       The person generally directly responsible for overseeing the cash and credit functions, financial planning, and capital expenditures is the:

  1. A) Chief operations officer.

 

  1. B)

 

  1. C)

 

  1. D) Chairman of the board.

 

  1. E)

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

165)       In corporate agency theory, managers are ________, and owners are ________.

 

  1. A) Agents, principals.

 

  1. B) Principals; agents.

 

  1. C) Agents; contractors.

 

  1. D) Shareholder; bondholders.

 

  1. E) Bondholders; shareholder.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

163)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

164)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

165)

 

 

 

 

 

 

 

 

 

 

 

 

55

 

166)       Dealer markets:

 

  1. A) Are called over-the-counter markets.

 

  1. B) Only exist outside of Canada.

 

  1. C) Are reserved strictly for trading debt securities.

 

  1. D) List only the securities of the largest firms.

 

  1. E) Include NASDAQ and the New York Stock Exchange.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

167)       What are the two types of primary market transactions that corporations engage in?

 

  1. A) Debt and equity placements.

 

  1. B) Dutch auctions and orderly offerings.

 

  1. C) Public offerings and private placements.

 

  1. D) Staggered and orderly offerings.

 

  1. E) Primary and secondary placements.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

168)       A stakeholder is:

 

  1. A) A person or entity including a stockholder or creditor, who potentially has a claim on the cash flows of the firm.

 

  1. B) A proxy vote made at a shareholders’ meeting.

 

  1. C) An original creditor of the firm.

 

  1. D) Given to each stockholder when they first purchase their stock.

 

  1. E) A founding stockholder of the firm.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

166)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

167)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

168)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

56

 

169)       A general partner:

 

  1. A) Faces double taxation whereas a limited partner does not.

 

  1. B) Is the term applied only to corporations which invest in partnerships.

 

  1. C) Has more management responsibility than a limited partner.

 

  1. D) Cannot lose more than the amount of his/her equity investment.

 

  1. E) Has less legal liability than a limited partner.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

170)       The best definition of “money markets” is:

 

  1. A) Financial markets where foreign currency is bought and sold.

 

  1. B) Financial markets where long-term debt securities are bought and sold.

 

  1. C) Financial markets where long-term debt and equity securities are bought and sold.

 

  1. D) Financial markets where shares are bought and sold for cash.

 

  1. E) Financial markets where short-term debt securities are bought and sold.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

171)       The primary market is defined as the market:

 

  1. A) Wherein the original sale of securities by the issuer to the general public occurs.

 

  1. B) Operated by brokers for the benefit of shareholders.

 

  1. C) Where stocks and bonds are exchanged between dealers.

 

  1. D) Mechanism by which a sale of a financial instrument between two shareholders is conducted.

 

  1. E) Commonly known as the over-the-counter market.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

169)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

170)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

171)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

57

 

172)       The best definition of “capital markets” is:

 

  1. A) The purchase or sale of securities whose value derives from the price of another, underlying, asset.

 

  1. B) The possibility of conflicts between shareholders and management in a large corporation.
  2. C) The process of planning and managing a firm’s long-term investments.

 

  1. D) A venue where long-term debt and equity securities are bought and sold.

 

  1. E) A venue where buyers and sellers of capital equipment come together to trade such assets.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

173)       Which one of the following statements concerning stock exchanges is correct?

 

  1. A) The TSX is primarily a dealer market.

 

  1. B) The exchange with the strictest listing requirements is NASDAQ.

 

  1. C) The NASDAQ has more listed stocks than NYSE.

 

  1. D) Some large companies are listed on NASDAQ.

 

  1. E) Most debt securities are traded on the TSX.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

174)       Limited liability may be a characteristic of each of the following form(s) of organization EXCEPT a ________.

  1. A) Co-operative(Co-op)

 

  1. B) Limited liability company.

 

  1. C) Limited partnership.

 

  1. D)

 

  1. E) Sole proprietorship.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

 

172)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

173)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

174)

 

 

 

 

 

 

 

 

 

 

 

58

 

175)       Cash flow from a firm’s assets can be:

 

  1. A) Paid out as interest.

 

  1. B) Invested in money market funds.

 

  1. C) Distributed to bondholders.

 

  1. D) Reinvested to other companies.

 

  1. E) Reinvested back in the company.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

176)       Capital structure refers to:

 

  1. A) The management of Long-term investments.

 

  1. B) The accounts receivable policy.

 

  1. C) The mixture of debt and equity.

 

  1. D) The amount of inventory held.

 

  1. E) The amount of cash on hand.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

177)       An agency problem is said to exist when there is a conflict of interest between ________

 

and ________.

 

  1. A) A principal; his or her agent.

 

  1. B) A shareholder; a stakeholder.

 

  1. C) A broker; a dealer.

 

  1. D) An agent; his or her representative.

 

  1. E) One shareholder; another shareholder.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

175)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

176)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

177)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

59

 

178)       The division of profits and losses among the members of a partnership is formalized in the:

  1. A) Indenture contract.

 

  1. B) Partnership agreement.

 

  1. C) Statement of purpose.

 

  1. D) Group charter.

 

  1. E) Indemnity clause.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

179)       Which of the following is NOT considered one of the basic questions of corporate finance?

  1. A) What long-term investments should the firm choose?

 

  1. B) Where will the firm get the long-term financing to pay for its investments?

 

  1. C) At what rate of interest should a firm borrow?

 

  1. D) How should the firm manage its working capital, i.e., its everyday financial activities?

 

  1. E) What mixture of debt and equity should the firm use to fund its operations?

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

180)       What was the intent of the Sarbanes-Oxley Act?

 

  1. A) It was intended to provide consumer protection on product quality.

 

  1. B) It was intended to protect investors from corporate abuses.

 

  1. C) It was intended to increase corporate social responsibility of publicly listed organizations.

 

  1. D) It was intended to protect employees through better corporate codes of conduct.

 

  1. E) It was intended to harmonize accounting standards in North America.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

178)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

179)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

180)

 

 

 

 

 

 

 

 

 

 

 

60

 

181)       Which of the following is disadvantage of a sole proprietorship?

 

  1. A) Quick decision making.

 

  1. B) Unlimited liability.

 

  1. C) Can be created through a simple business license.

 

  1. D) Less reliance on partners.

 

  1. E) The owner receiving all the after-tax profit.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

182)       Which one of the following statements is correct concerning the organizational structure of a corporation?

  1. A) The controller reports to the president.

 

  1. B) The vice president of finance reports to the chairman of the board.

 

  1. C) The chief operations officer reports to the vice president of production.

 

  1. D) The chief executive officer reports to the board of directors.

 

  1. E) The treasurer reports to the chief executive officer.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

183)       The possibility of conflict of interest between the stockholders and management of the firm is called:

  1. A) Legal liability.

 

  1. B) Corporate breakdown.

 

  1. C) The agency problem.

 

  1. D) The shareholders’ conundrum.

 

  1. E) Corporate activism.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

181)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

182)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

183)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

61

 

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

 

  1. A) The profits of a sole proprietorship are taxed twice.

 

  1. B) The owner of a sole proprietorship may be forced to sell his/her personal assets to pay company debts.

 

  1. C) A sole proprietorship is the least common form of business ownership.

 

  1. D) A sole proprietorship is often structured as a limited liability company.

 

  1. E) The owners of a sole proprietorship share profits as established by the partnership agreement.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

185)       You are interested in purchasing 100 shares of stock in one of the largest corporations in the Canada. You would most likely purchase the shares in ________.

  1. A) A secondary market operated as an auction market.

 

  1. B) A primary market operated as a dealer market.

 

  1. C) A primary market operated as an auction market.

 

  1. D) A secondary market operated as a dealer market.

 

  1. E) A secondary market operated as a money market.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

186)       Which of the following is a type of agency cost?

 

  1. A) Salaries paid to the firm’s managers.

 

  1. B) The costs of financing the firm.

 

  1. C) The cost of buying insurance on the firm’s assets.

 

  1. D) The cost of an audit of the firm’s financial statements.

 

  1. E) The cost of a corporate jet needed to keep tabs on foreign operations.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

184)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

185)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

186)

 

 

 

 

 

 

 

 

 

 

 

 

62

 

187)       The treasurer can be defined as the person who is generally responsible for overseeing the ________ of a firm.

  1. A) Data processing functions.

 

  1. B) Tax matters.

 

  1. C) Financial planning.

 

  1. D) Cost accounting.

 

  1. E) Financial accounting.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

188)       The Chief Financial Officer of a corporation is the:

 

  1. A) Vice President of Finance.

 

  1. B) Corporate Treasurer.

 

  1. C) Chairman of the Board.

 

  1. D) Chief Executive Officer.

 

  1. E)

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

189)       Capital structure decisions include which of the following?

 

  1. A) Determining the number of shares of stock to issue.

 

  1. B) Evaluating the size of inventory to be kept on hand.

 

  1. C) Allocating funds to the various divisions within the firm.

 

  1. D) Determining whether the firm should purchase or lease some equipment.

 

  1. E) Evaluating the customer credit policy.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

187)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

188)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

189)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

63

 

190)       Ann is interested in purchasing Ted’s factory. Since Ann is a poor negotiator, she hires Mary to negotiate the purchase price. Identify the parties to this transaction.

  1. A) Mary is the agent while Ted and Ann together are principals.

 

  1. B) Mary is the principal and Ann is the agent.

 

  1. C) Ann is the principal and Mary is the agent.

 

  1. D) Ann is the principal and Ted is the agent.

 

  1. E) Ted is the principal and Ann is the agent.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

191)       Which of the following statements is false concerning limited partnerships?

 

  1. A) Limited partners are responsible for all debts of the partnership.

 

  1. B) Limited partnerships have limited liability (to the extent of their investment).

 

  1. C) Limited partners generally do not manage the partnership.

 

  1. D) Limited partnerships can bring in more partners.

 

  1. E) In a limited partnership, all partners share is limited to the amount contributed to the partnership.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

192)       What is NOT a working capital question that must be answered?

 

  1. A) Length of credit terms to provide

 

  1. B) To whom should credit be extended to?

 

  1. C) How much cash and inventory should be kept on hand?

 

  1. D) Net present value (NPV) and internal rate of return (IRR) of a long-term project

 

  1. E) Should we sell on credit?

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

190)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

191)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

192)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

64

 

193)       Which one of the following transactions would occur in the primary market?

 

  1. A) A financial institution selling shares of OPQ stock to another financial institution.

 

  1. B) An individual selling shares of JKL stock to an existing JKL shareholder.

 

  1. C) KM Co. selling new shares of stock to a financial institution.

 

  1. D) The gifting of ABC Co. shares by a grandmother to her grandchildren.

 

  1. E) A financial institution buying shares of LM stock from an LM executive.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

194)       The Corporate Treasurer is in charge of:

 

  1. A) Credit management.

 

  1. B) Tax management.

 

  1. C) Financial accounting.

 

  1. D) Cost accounting.

 

  1. E) Data processing.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

193)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

194)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65

 

195)       Trace the passage of cash from the financial markets to the firm and from the firm back to the financial markets.

  1. A) The firm invests the cash in current and fixed assets. 2. Cash flows to the firm from the financial market. 3. These assets generate cash. 4. Corporate taxes are paid.

 

  1. Cash flow is reinvested in the firm. 6. The rest goes back to the financial markets as cash paid to creditors and shareholders.
  2. B) The firm invests the cash in current and fixed assets. 2. These assets generate cash. 3. Cash flows to the firm from the financial market. 4. Corporate taxes are paid. 5. Cash flow is reinvested in the firm. 6. The rest goes back to the financial markets as cash paid to creditors and shareholders.

 

  1. C) Cash flows to the firm from the financial market. 2. The firm invests the cash in current and fixed assets. 3. These assets generate cash. 4. Corporate taxes are paid.

 

  1. Cash flow is reinvested in the firm. 6. The rest goes back to the financial markets as cash paid to creditors and shareholders.
  2. D) The firm invests the cash in current and fixed assets. 2. These assets generate cash. 3. The rest goes back to the financial markets as cash paid to creditors and shareholders. 4. Cash flows to the firm from the financial market. 5. Corporate taxes are paid. 6. Cash flow is reinvested in the firm.

 

  1. E) The firm invests the cash in current and fixed assets. 2. Corporate taxes are paid.

 

  1. These assets generate cash. 4. Cash flows to the firm from the financial market. 5. Cash flow is reinvested in the firm. 6. The rest goes back to the financial markets as cash paid to creditors and shareholders.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

196)       “Capital budgeting” is defined as the:

 

  1. A) Mix of debt and equity used by a firm to finance its operations.

 

  1. B) Determination of the total amount of money which a firm should borrow.

 

  1. C) Management of a firm’s long-term investments.

 

  1. D) Management of a firm’s net working capital.

 

  1. E) Process of determining the optimal types and amounts of inventory to keep on hand.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

195)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

196)

 

 

 

 

 

 

 

 

 

 

 

66

 

197)       The best definition of “capital structure” is:

 

  1. A) A venue where buyers and sellers of capital equipment come together to trade such assets.

 

  1. B) How a firm is financed through different proportions of debt and equity.

 

  1. C) A venue where long-term debt and equity securities are bought and sold.

 

  1. D) The process of planning and managing a firm’s long-term investments.

 

  1. E) The possibility of conflicts between shareholders and management in a large corporation.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

198)       The primary goal of financial management is to maximize the:

 

  1. A) Compensation of the corporate officers.

 

  1. B) Number of shares of common stock outstanding.

 

  1. C) Current value of each share of outstanding stock.

 

  1. D) Book value of the firm.

 

  1. E) Growth rate of a firm.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

199)       The primary goal of financial management is to:

 

  1. A) Avoid financial distress.

 

  1. B) Maximize current sales.

 

  1. C) Maintain steady earnings growth.

 

  1. D) Maximize the current value per share of the existing stock.

 

  1. E) Minimize operational costs.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

197)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

198)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

199)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

67

 

200) Which of the following is NOT an agency cost?          200)

  1. A) Interest paid on long-term corporate borrowing.

 

  1. B) Flying an executive overseas without a genuine business purpose for doing so.

 

  1. C) Protecting management jobs which could effectively be eliminated.

 

  1. D) Paying more than the actual market value to purchase a competitor.

 

  1. E) Low-interest loans to corporate executives.

 

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

 

201) Elaborate on the financial management function. In particular, the 201)

inter-relationships between the CEO, COO and CFO. Expand on the CFO’s responsibility from an accounting and finance perspective.

 

Answer: The financial management function is usually associated with a top officer of the firm, such as a vice president of finance or some other chief financial officer (CFO). The CFO reports to the president, who is the chief operating officer (COO) in charge of day-to-day operations. The COO reports to the chairman, who is usually chief executive officer (CEO). The CEO has overall responsibility to the board. The CFO coordinates the activities of the treasurer and the controller. The controller’s office handles cost and financial accounting, tax payments, and management information systems. The treasurer’s office is responsible for managing the firm’s cash, its financial planning, and its capital expenditures.

Explanation:

 

202) How do chartered banks generate income?               202)

 

 

Answer: Chartered banks generate income from the spread between interest paid on deposits and interest earned on loans, from selling life insurance through their branch networks, and from services provided to corporate clients such as bank guarantees.

Explanation:

 

203) Describe the goal of financial management and give an example of a             203)

management compensation program which is designed to encourage managers to adhere to that goal.

 

Answer: The goal of financial management is to increase the value of the existing owners’ equity. Stock options are designed to reward managers when the value of the stock rises.

Explanation:

 

 

 

 

 

 

68

 

204)       What is the main drawback of the triple bottom line measure?  204)

Answer: One problem with the triple bottom line is that the three separate measures

cannot easily be added up. It is difficult to measure the planet and people

accounts in the same terms as profits.

Explanation:

205)       Why is the corporate form of business organization considered to be more         205)

important than sole proprietorships or partnerships?

Answer: The importance of the corporate form of organization lies in its advantages:

ease of transferring ownership, the owners’ limited liability for business

debts, and unlimited life of the business.

Explanation:

206)       List and briefly describe the three basic questions addressed by a financial           206)

manager.

 

 

Answer: The three areas to be addressed are:

 

  1. Capital budgeting: The financial manager tries to identify investment opportunities that are worth more to the firm than they cost to acquire.
  2. Capital structure: This refers to the specific mixture of long-term debt and equity a firm uses to finance its operations.

 

  1. Working capital management: This refers to a firm’s short-term assets and short-term liabilities. Managing the firm’s working capital is a day-to-day activity that ensures the firm has sufficient resources to continue its operations and avoid costly interruptions.

Explanation:

 

207) Assume for a moment that the stockholders in a corporation have unlimited             207)

liability for corporate debts. If so, what impact would this have on the functioning of primary and secondary markets for common stock?

 

Answer: With unlimited liability, you would be very careful which stocks you invest in. In particular, you would not invest in companies you expected to be unable to satisfy their financial obligations. Both the primary and secondary markets for common stock would be severely hampered if this rule existed. It would be very difficult for a young, untested business to get enough capital to grow.

 

Explanation:

 

208) Provide several advantages of the corporate form of business ownership. 208)

 

 

Answer: The advantages of the corporation include: limited liability for firm debt; Ability to raise capital; Unlimited firm life.

Explanation:

 

 

 

 

 

 

 

69

 

209) Suppose you own 100 shares of IBM stock which you intend to sell today. Since       209)

you will sell it in the secondary market, IBM will receive no direct cash flows as a consequence of your sale. Why, then, should IBM’s management care about the price you get for your shares?

 

Answer: The current market price of IBM stock reflects, among other things, market opinion about the quality of firm management. If the shareholder’s sale price is low, this indirectly reflects on the reputation of the managers, as well as potentially impacting their standing in the employment market. Alternatively, if the sale price is high, this indicates that the market believes current management is increasing firm value, and therefore doing a good job.

 

Explanation:

 

210) Explain how ethics can affect the value of a public corporation.        210)

 

 

Answer: Student answers will vary but should explain that proper ethical behaviour enhances the market perception of a firm, increases customer satisfaction, lowers agency costs, and in general, increases the market value of the firm, which is the goal of financial management.

Explanation:

 

211) What is the difference between third a fourth markets?     211)

 

 

Answer: A third market involves trading exchange-listed securities in OTC markets, while a fourth market trading involves institution-to-institution trading without using the services of brokers or dealers.

Explanation:

 

212) What should be the goal of the financial manager of a corporation? Why?   212)

 

 

Answer: The correct goal is to maximize the current value of the outstanding stock. This focuses correctly on enhancing the returns to shareholders, the owners of the firm. Other goals, such as maximizing earnings, focus too narrowly on accounting income and ignore the importance of market values in managerial finance.

Explanation:

 

213) One thing lenders sometimes require when lending money to a small corporation 213) is an assignment of the common stock as collateral on the loan. Then, if the

 

 

business fails to repay its loan, the ownership of the stock certificates can be transferred directly to the lender. Why might a lender want such an assignment? What advantage of the corporate form of organization comes into play here?

 

Answer: In the event of a loan default, a lender may wish to liquidate the business. Often it is time consuming and difficult to take title of all of the business assets individually. By taking control of the stock, the lender is able to sell the business simply by reselling the stock in the business. This illustrates once again the ease of transfer of ownership of a corporation.

Explanation:

 

 

70

 

214)       Provide several common characteristics between a sole proprietorship and a general partnership.

 

Answer: Common elements include: method of taxation; limited life of business

 

entity; personal liability.

 

Explanation:

 

215)       Explain the cash flow pattern between a firm and the financial markets.

 

Answer: A firm issues securities in the financial markets and receives cash in exchange. This cash is used to purchase assets that in turn generate cash flows. These cash flows are used to reinvest in additional firm assets, pay taxes, pay dividends, cover debt payments, and pay interest to the holders of the firm’s securities.

 

 

214)

 

 

 

 

 

 

 

 

215)

 

 

Explanation:

 

216) Provide several disadvantages of a partnership.      216)

 

 

Answer: Disadvantages of partnership include: limited life of the firm; personal liability for firm debt; lack of ability to transfer partnership interest.

Explanation:

 

217) Do you think agency problems arise in sole proprietorships and/or partnerships?    217)

 

 

Answer: Agency conflicts typically arise when there is a separation of ownership and management of a business. In a sole proprietorship and a small partnership, such separation is not likely to exist to the degree it does in a corporation. However, there is still potential for agency conflicts. For example, as employees are hired to represent the firm, there is once again a separation of ownership and management.

Explanation:

 

218) What is a hedge fund and what strategies does it utilize? Who is it intended for?     218)

 

 

Answer: Hedge funds are largely unregulated and privately managed investment funds catering to sophisticated investors, which look to earn high returns using aggressive financial strategies prohibited by mutual funds. These strategies may include arbitrage, high levels of leverage, and active involvement in the derivatives market.

Explanation:

 

219) What items are included in the articles of incorporation?     219)

 

 

Answer: The articles of incorporation must contain a number of things, including the corporation’s name, its intended life (which can be forever), its business purpose, and the number of shares that can be issued.

Explanation:

 

 

 

 

 

 

 

 

71

 

220)       Identify the two capital structure issues that financial managers must address and explain the effects and significance of these issues.

 

Answer: Financial managers must first determine which debt-equity mix is best for the firm. Secondly, financial managers must determine the least expensive sources of financing. These decisions will affect both the risk level and the value of the firm. These decisions are significant as they establish the long-term debt obligations of the firm. Should a firm assume too much debt, it could face bankruptcy if the future cash flows cannot support the

 

debt load.

 

Explanation:

 

221)       What aspects of cash flows is part of the financial manager’s responsibility?

 

Answer: The financial manager is responsible for: the amount of the cash flow; timing of the cash flow; likelihood of the cash flow being received; possibility that only a portion of the expected cash flow will be received.

 

 

220)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

221)

 

 

Explanation:

222) If the corporate form of business organization has so many advantages over the     222)

corporate form, why is it so common for small businesses to initially be formed

as sole proprietorships?

 

 

Answer: A significant advantage of the sole proprietorship is that it is cheap and easy to form. If the sole proprietor has limited capital to start with, it may not be desirable to spend part of that capital forming a corporation. Also, limited liability for business debts may not be a significant advantage if the proprietor has limited capital, most of which is tied up in the business anyway. Finally, for a typical small business, the heart and soul of the business is the person who founded it, so the life of the business may effectively be limited to the life of the founder during its early years.

Explanation:

 

223) Why might a corporation wish to list its shares on a national exchange such as the 223) TSX as opposed to a regional exchange? How about being traded OTC?

 

 

Answer: Being listed on a regional exchange effectively limits the capital access for the business. Plus, there is a prestige factor in being listed on one of the national exchanges. There is still a prestige factor in moving from OTC to the TSX since the TSX has more restrictive membership requirements.

Explanation:

 

224) Describe two types of business organizations in which you could obtain an 224)

ownership position while enjoying limited liability. Provide an example of a type of firm that you might find utilizing each business type.

 

Answer: The organizations include a corporation and a limited partnership. Firms which require large sums of external financing will commonly choose the corporate form. Real estate ventures often involve limited partnerships.

Explanation:

 

 

72

 

225) Define the concept of a corporation, along with several advantages and      225)

disadvantages of conducting business as a corporation.

 

Answer: A corporation is a business created as a distinct legal operating unit that is owned by one or more individuals or entities. Advantages include: ownership can be easily transferred; life of a corporation is not limited to lives of owners or managers; a corporation has limited liability; the ability to raise and access large sums of capital in both debt and equity markets. Disadvantages include: double taxation; lenders view the limited liability as a disadvantage and require the owners of small corporations to make personal guarantees; more complex and expensive form of organization to establish.

 

Explanation:

 

226) What is the triple bottom line? What does it measure?         226)

 

Answer: The triple bottom line consists of three Ps: profit, people and planet. It aims to measure the financial, social and environmental performance of the corporation over a period of time.

 

The triple bottom line suggests that firms should be focusing on three interdependent measures of success.

 

One is the traditional measure of corporate profit; the second is a measure of a firm’s employees and a firm’s responsibility throughout the organization. The third pertains to how environmentally responsible a firm has been.

Explanation:

 

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

 

227)       The Sarbanes-Oxley Act was intended to increase corporate social responsibility of publicly listed organizations.

 

Answer:               True        False

Explanation:

 

228)       Deciding if a new project should be accepted is a working capital decision.

 

Answer:               True        False

Explanation:

 

229)       Corporate social responsibility (CSR) is also referred to as the triple bottom line.

 

Answer:    True  False

Explanation:

 

230)       Capital structure determines how much debt the firm should have in relation to its level of equity.

 

Answer:    True  False

Explanation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

227)

 

 

 

 

 

 

228)

 

 

 

 

 

229)

 

 

 

 

 

230)

 

 

 

 

 

73

 

231)       When owners are managers (such as in a sole proprietorship), a firm will have agency costs.

 

Answer:               True        False

Explanation:

 

232)       The primary goal of financial management is to minimize the corporate tax liability.

 

Answer:               True        False

Explanation:

 

233)       The collapse of companies like Enron and Worldcom illustrates the impact unethical behaviour on public trust and confidence.

 

Answer:    True  False

Explanation:

 

234)       The Sarbanes-Oxley Act was intended to protect investors from corporate abuses.

 

Answer:    True  False

Explanation:

 

235)       Establishing the accounts receivable policies is a capital structure decision.

 

Answer:               True        False

Explanation:

 

236)       The goal of financial managers does not imply that illegal or unethical actions should be taken in the hope of increasing the value of the the firm.

 

Answer:    True  False

Explanation:

 

237)       The primary goal of a financial manager should be to maximize the value of shares issued to new investors in the corporation.

 

Answer:               True        False

Explanation:

 

238)       A capital expenditure project becomes desirable when the project is worth more to the firm than the cost to acquire it.

 

Answer:    True  False

Explanation:

 

239)       Partnership income is treated as personal income of the partners.

 

Answer:    True  False

Explanation:

 

240)       Capital structure determines the level of current assets that is required to maintain the firm’s operational level.

 

Answer:               True        False

Explanation:

 

 

231)

 

 

 

 

 

 

232)

 

 

 

 

 

233)

 

 

 

 

 

 

234)

 

 

 

 

 

235)

 

 

 

 

 

236)

 

 

 

 

 

 

237)

 

 

 

 

 

 

238)

 

 

 

 

 

 

239)

 

 

 

 

 

240)

 

 

 

 

 

 

74

 

241)       Control of the firm ultimately rests with board of directors. They elect the management, who, in turn, lead the company.

 

Answer:               True        False

Explanation:

 

242)       Capital structure determines the least expensive sources of funds for the firm to borrow.

 

Answer:    True  False

Explanation:

 

243)       Determining when a supplier should be paid is a capital structure decision.

 

Answer:               True        False

Explanation:

 

244)       Determining the amount of money to borrow in order to finance a 10-year project is a capital structure decision.

 

Answer:    True  False

Explanation:

 

245)       There is a significant relationship between CSR activity and corporate performance.

 

Answer:               True        False

Explanation:

 

246)       Stakeholder theory suggests that employees, customers, suppliers, and various levels of government all have financial interests in the firm.

 

Answer:    True  False

Explanation:

 

247)       Maximization of the current earnings of the firm is the main goal of the financial manager.

 

Answer:               True        False

Explanation:

 

248)       Corporate social responsibility (CSR) is also referred to as corporate sustainability.

 

Answer:    True  False

Explanation:

 

 

241)

 

 

 

 

 

 

242)

 

 

 

 

 

243)

 

 

 

 

 

244)

 

 

 

 

 

 

245)

 

 

 

 

 

246)

 

 

 

 

 

 

247)

 

 

 

 

 

 

248)

 

 

 

249)       In capital budgeting, the financial manager tries to identify investment opportunities that            249)

are worth more to the firm than they cost to acquire.

Answer:               True       False

Explanation:

250)       Control of the firm ultimately rests with shareholders. They elect the board of directors,              250)

who, in turn, hire and fire management.

Answer:               True       False

 

Explanation:

 

 

 

 

 

75

 

251)       The triple bottom line is defined as a company’s commitment to operate in an economically, socially and environmentally sustainable manner.

 

Answer:    True  False

Explanation:

 

252)       Working capital management addresses the firm’s appropriate level of inventory.

 

Answer:    True  False

Explanation:

 

253)       IBEC Inc. of Toronto spends approximately $2 million annually to hire auditors to go over the firm’s financial statements. This is an example of an indirect agency cost.

 

Answer:               True        False

Explanation:

 

254)       Capital structure determines how much risk is associated with the future cash flows of a project.

 

Answer:               True        False

Explanation:

 

255)       Research results on CSR activity and corporate performance has been mixed.

 

Answer:    True  False

Explanation:

 

 

251)

 

 

 

 

 

 

252)

 

 

 

 

 

253)

 

 

 

 

 

 

254)

 

 

 

 

 

 

255)

 

 

 

256)       The board of directors has the power to act on behalf of the shareholders to hire and fire the operating management of the firm. In a legal sense, the directors are “principals” and the shareholders are “agents”.

 

Answer:               True        False

Explanation:

 

257)       Unethical behaviour does not impact volatility of the stock markets.

 

Answer:               True        False

Explanation:

 

 

256)

 

 

 

 

 

 

 

 

257)

 

 

 

258)       When evaluating a project in which a firm might invest, the size but not the timing of the             258)

cash flows is important.

Answer:               True       False

Explanation:

259)       Common stockholders or limited partners can lose, at most, what they have invested in a            259)

firm.

Answer:               True       False

Explanation:

260)       A capital expenditure project becomes desirable when the value of the cash flow            260)

generated by the project exceeds the project’s cost.

Answer:               True       False

 

Explanation:

 

 

76

 

261) The size, timing and risk of cash flows are important when evaluating a capital          261)

budgeting decision.

Answer:True      False

Explanation:

 

 

262) A limited partner can lose his or her investment in the partnership.                262)

Answer:True      False

Explanation:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Testname: C1

 

 

 

201)       The financial management function is usually associated with a top officer of the firm, such as a vice president of finance or some other chief financial officer (CFO). The CFO reports to the president, who is the chief operating officer (COO) in charge of day-to-day operations. The COO reports to the chairman, who is usually chief executive officer (CEO). The CEO has overall responsibility to the board. The CFO coordinates the activities of the treasurer and the controller. The controller’s office handles cost and financial accounting, tax payments, and management information systems. The treasurer’s office is responsible for managing the firm’s cash, its financial planning, and its capital expenditures.

 

202)       Chartered banks generate income from the spread between interest paid on deposits and interest earned on loans, from selling life insurance through their branch networks, and from services provided to corporate clients such as bank guarantees.

203)       The goal of financial management is to increase the value of the existing owners’ equity. Stock options are designed to reward managers when the value of the stock rises.

204)       One problem with the triple bottom line is that the three separate measures cannot easily be added up. It is difficult to measure the planet and people accounts in the same terms as profits.

205)       The importance of the corporate form of organization lies in its advantages: ease of transferring ownership, the owners’ limited liability for business debts, and unlimited life of the business.

206)       The three areas to be addressed are:

 

  1. Capital budgeting: The financial manager tries to identify investment opportunities that are worth more to the firm than they cost to acquire.

 

  1. Capital structure: This refers to the specific mixture of long-term debt and equity a firm uses to finance its operations.
  2. Working capital management: This refers to a firm’s short-term assets and short-term liabilities. Managing the firm’s working capital is a day-to-day activity that ensures the firm has sufficient resources to continue its operations and avoid costly interruptions.

 

207)       With unlimited liability, you would be very careful which stocks you invest in. In particular, you would not invest in companies you expected to be unable to satisfy their financial obligations. Both the primary and secondary markets for common stock would be severely hampered if this rule existed. It would be very difficult for a young, untested business to get enough capital to grow.

 

208)       The advantages of the corporation include: limited liability for firm debt; Ability to raise capital; Unlimited firm life.

 

209)       The current market price of IBM stock reflects, among other things, market opinion about the quality of firm management. If the shareholder’s sale price is low, this indirectly reflects on the reputation of the managers, as well as potentially impacting their standing in the employment market. Alternatively, if the sale price is high, this indicates that the market believes current management is increasing firm value, and therefore doing a good job.

210)       Student answers will vary but should explain that proper ethical behaviour enhances the market perception of a firm, increases customer satisfaction, lowers agency costs, and in general, increases the market value of the firm, which is the goal of financial management.

 

211)       A third market involves trading exchange-listed securities in OTC markets, while a fourth market trading involves institution-to-institution trading without using the services of brokers or dealers.

 

 

 

82

 

Answer Key

 

Testname: C1

 

 

 

212)       The correct goal is to maximize the current value of the outstanding stock. This focuses correctly on enhancing the returns to shareholders, the owners of the firm. Other goals, such as maximizing earnings, focus too narrowly on accounting income and ignore the importance of market values in managerial finance.

 

213)       In the event of a loan default, a lender may wish to liquidate the business. Often it is time consuming and difficult to take title of all of the business assets individually. By taking control of the stock, the lender is able to sell the business simply by reselling the stock in the business. This illustrates once again the ease of transfer of ownership of a corporation.

 

214)       Common elements include: method of taxation; limited life of business entity; personal liability.

 

215)       A firm issues securities in the financial markets and receives cash in exchange. This cash is used to purchase assets that in turn generate cash flows. These cash flows are used to reinvest in additional firm assets, pay taxes, pay dividends, cover debt payments, and pay interest to the holders of the firm’s securities.

216)       Disadvantages of partnership include: limited life of the firm; personal liability for firm debt; lack of ability to transfer partnership interest.

 

217)       Agency conflicts typically arise when there is a separation of ownership and management of a business. In a sole proprietorship and a small partnership, such separation is not likely to exist to the degree it does in a corporation. However, there is still potential for agency conflicts. For example, as employees are hired to represent the firm, there is once again a separation of ownership and management.

 

218)       Hedge funds are largely unregulated and privately managed investment funds catering to sophisticated investors, which look to earn high returns using aggressive financial strategies prohibited by mutual funds. These strategies may include arbitrage, high levels of leverage, and active involvement in the derivatives market.

 

219)       The articles of incorporation must contain a number of things, including the corporation’s name, its intended life (which can be forever), its business purpose, and the number of shares that can be issued.

 

220)       Financial managers must first determine which debt-equity mix is best for the firm. Secondly, financial managers must determine the least expensive sources of financing. These decisions will affect both the risk level and the value of the firm. These decisions are significant as they establish the long-term debt obligations of the firm. Should a firm assume too much debt, it could face bankruptcy if the future cash flows cannot support the debt load.

221)       The financial manager is responsible for: the amount of the cash flow; timing of the cash flow; likelihood of the cash flow being received; possibility that only a portion of the expected cash flow will be received.

 

222)       A significant advantage of the sole proprietorship is that it is cheap and easy to form. If the sole proprietor has limited capital to start with, it may not be desirable to spend part of that capital forming a corporation. Also, limited liability for business debts may not be a significant advantage if the proprietor has limited capital, most of which is tied up in the business anyway. Finally, for a typical small business, the heart and soul of the business is the person who founded it, so the life of the business may effectively be limited to the life of the founder during its early years.

 

223)       Being listed on a regional exchange effectively limits the capital access for the business. Plus, there is a prestige factor in being listed on one of the national exchanges. There is still a prestige factor in moving from OTC to the TSX since the TSX has more restrictive membership requirements.

 

 

 

83

 

Answer Key

 

Testname: C1

 

 

 

224)       The organizations include a corporation and a limited partnership. Firms which require large sums of external financing will commonly choose the corporate form. Real estate ventures often involve limited partnerships.

 

225)       A corporation is a business created as a distinct legal operating unit that is owned by one or more individuals or entities. Advantages include: ownership can be easily transferred; life of a corporation is not limited to lives of owners or managers; a corporation has limited liability; the ability to raise and access large sums of capital in both debt and equity markets. Disadvantages include: double taxation; lenders view the limited liability as a disadvantage and require the owners of small corporations to make personal guarantees; more complex and expensive form of organization to establish.

 

226)       The triple bottom line consists of three Ps: profit, people and planet. It aims to measure the financial, social and environmental performance of the corporation over a period of time.

 

The triple bottom line suggests that firms should be focusing on three interdependent measures of success.

 

One is the traditional measure of corporate profit; the second is a measure of a firm’s employees and a firm’s responsibility throughout the organization. The third pertains to how environmentally responsible a firm has been.

Exam

 

Name___________________________________

 

 

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) A reduction in interest expense, all else constant, will cause a(n):        1)

  1. A) Increase in the cash coverage ratio.
  2. B) Decrease in the long-term debt ratio.
  3. C) Decrease in the return on equity.
  4. D) Decrease in the times interest earned ratio.
  5. E) Increase in the price earnings ratio.

Answer: A

Explanation:       A)

  1. B)
  2. C)
  3. D)
  4. E)

2) From a cash flow position, which one of the following ratios best measures a firm’s    2)

ability to pay the interest on its debts?

  1. A) Times interest earned ratio
  2. B) Interval measure
  3. C) Cash ratio
  4. D) Quick ratio
  5. E) Cash coverage ratio

Answer: E

Explanation:       A)

  1. B)
  2. C)
  3. D)
  4. E)

3) On the statement of cash flows, the change in current assets is listed in the section    3)

entitled:

 

  1. A) Merger activity.

 

  1. B) Operating activity.

 

  1. C) Working activity.

 

  1. D) Financing activity.

 

  1. E) Investment activity.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

 

 

 

 

1

 

4)            Which one of the following statements is correct if a firm has a receivables turnover measure of 10?

  1. A) It takes a firm 36.5 days to pay its creditors.

 

  1. B) It takes a firm 10 days to collect payment from its customers.

 

  1. C) It takes a firm 36.5 days to sell its inventory and collect the payment from the sale.

 

  1. D) The firm has ten times more in accounts receivable than it does in cash.

 

  1. E) The firm has an average collection period of 36.5 days.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

5)            Calculate total current assets given the following information. Cash $10,000; supplies $3,000; average collection period 54.75 days; days’ sales in inventory 91.25 days; sales $80,000; COGS $60,000.

  1. A) $38,000 B) $34,000 C) $42,000           D) $36,000           E) $40,000

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

6)            Profit margin is defined as:

 

  1. A) EBIT divided by total assets.

 

  1. B) Net income divided by sales.

 

  1. C) Net income divided by total assets.

 

  1. D) EBIT divided by sales.

 

  1. E) Cost of goods sold divided by sales.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

7)            Calculate net working capital turnover given the following data. Total fixed assets $200,000; long-term liabilities $55,000; total liabilities $80,000; total shareholders’ equity $220,000; total sales $800,000.

  1. A) 13.75 B) 9.67 C) 11.75                D) 10.67                E) 12.67

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7)

 

 

 

2

 

8) Use the following statement of financial position and statement of comprehensive    8)

income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What is the net working capital to total assets ratio for Bluebird for 2015?

 

  1. A) 28.17 % B) 47.15 % C) 46.11 %           D) 34.18 %           E) 39.27 %

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

9)            Calculate net income given the following information: shares outstanding = 1,250,000; stock price = $35/share; PE ratio = 12.50.

  1. A) $3,500,000

 

  1. B) $3,000,000

 

  1. C) $2,750,000

 

  1. D) $3,250,000

 

  1. E) $2,500,000

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

10)          How would a $5,000 increase in AR and a $2,000 decrease in inventory affect cash?

 

  1. A) $3,000 source

 

  1. B) $5,000 source; $2,000 use

 

  1. C) $2,000 source; $5,000 use

 

  1. D) $7,000 source

 

  1. E) $5,000 source; $2,000 source

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

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

 

  1. A) Uses the same accounting procedures as other firms in its industry.

 

  1. B) Has a different fiscal year than other firms in its industry.

 

  1. C) Tends to have one-time events such as asset sales and property acquisitions.

 

  1. D) Is a conglomerate.

 

  1. E) Is global in nature.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

12)          A ________ standardizes items on the statement of comprehensive income and statement of financial position relative to a point in time.

  1. A) Common-base year statement.

 

  1. B) Statement of changes in financial position.

 

  1. C) Common-size statement.

 

  1. D) Statement of standardization.

 

  1. E) Tax reconciliation statement.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

13)          Jorge Corp. of North Bay has 100,000 shares outstanding. EBIT is $1 million and interest paid is $200,001. If the corporate tax rate is 34%, what is Jorge’s earnings per share?

  1. A) $5.28 B) $6.60 C) $10.00              D) $3.40                E) $2.72

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

14)          14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What was the profit margin in 2015?

 

  1. A) 60.0% B) 22.7% C) 7.9% D) 18.4%              E) 26.2%

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

15) The following statement of financial position and statement of comprehensive income          15)

should be used.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What is Woodburn’s times interest earned ratio for 2015?

 

  1. A) 03 times

 

  1. B) 34 times

 

  1. C) 37 times

 

  1. D) 10 times

 

  1. E) 22 times

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

 

 

 

 

 

 

 

7

 

16)          Which of the following is a correct interpretation of a profit margin of 0.20?

 

  1. A) For each $1 of sales, $2 fall to the bottom line.

 

  1. B) For each $1 of sales the firm earns twenty cents before operating expenses.

 

  1. C) It takes sales of $1 to generate $20 in net profit after taxes.

 

  1. D) For each $1 of sales the firm earns twenty cents in net income.

 

  1. E) It takes twenty cents in sales to generate $1 in profit.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

17)          Last year, which is used as the base year, a firm had cash of $46, accounts receivable of $132, inventory of $319, and net fixed assets of $640. This year, the firm has cash of $52, accounts receivable of $147, inventory of $312, and net fixed assets of $576. What is the common-base year value of accounts receivable?

  1. A) 1.11 B) 1.13 C) .88     D) 1.18  E) .90

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

16)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

18)          18)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What was the total asset turnover in 2015?

 

  1. A) 0.57 B) 1.92 C) 0.25  D) 0.23  E) 0.52

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

19)          19)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What is the current ratio for 2015?

  1. A) 2.85 B) 2.18 C) 1.49  D) 2.03  E) 4.37

Answer: D

Explanation:       A)

  1. B)
  2. C)
  3. D)
  4. E)

 

20) Nu Plastics has accounts receivable of $6,400, inventory of $11,600, cash of $1,300,   20)

accounts payable of $8,800, sales of $117,600, and cost of goods sold of $89,300. What

is the net working capital turnover rate?

  1. A) 10.87 B) 6.09 C) 7.21  D) 11.20                E) 7.60

Answer: D

Explanation:       A)

  1. B)

 

C)

D)

E)

 

 

10

 

21)          Martin’s Method Acting School has a current ratio of 2, a quick ratio of 1.8, net income of $180,000, a profit margin of 10%, and an accounts receivable balance of $150,000. What is the firm’s average collection period?

  1. A) 30 days B) 43 days C) 16 days            D) 50 days           E) 24 days

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

22)          How would a $15,000 decrease in AR and a $8,000 increase in inventory affect cash?

 

  1. A) $7,000 use

 

  1. B) $15,000 use; $8,000 source

 

  1. C) $23,000 source

 

  1. D) $23,000 use

 

  1. E) $15,000 source; $8,000 use

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

23)          A firm has an ROA of 8%, sales of $100, and total assets of $71. What is its profit margin?

  1. A) 10.7% B) 4.3% C) 5.7% D) 16.7% E) 1.3%

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

21)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

22)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

24)          24)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

How many days does it take for inventory to sell? (Use 2015 inventory)

 

  1. A) 76 B) 59 C) 99      D) 4        E) 6

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

 

 

 

 

 

 

 

 

12

 

25)          The interval measure is an example of a(n)________ ratio.

 

  1. A) Market value.

 

  1. B) Financial leverage.

 

  1. C) Asset management.

 

  1. D) Short-term solvency.

 

  1. E)

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

26)          Rojers Communications Inc. sells for $34.50 and there are 605 million shares outstanding at the end of 2015. Based on the 2015 annual report, EBIT is $2,024 million, net income is $1,002 million, and depreciation is $1,760 million. What is the Enterprise Multiple?

  1. A) 5.52 B) 5.00 C) 20.83                D) 4.52  E) 10.31

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

27)          A Halifax firm generates net income of $530. The depreciation expense is $60 and dividends paid are $80. Accounts payable decrease by $40, accounts receivable decrease by $30, inventory increases by $20, and net fixed assets decrease by $40. What is the net cash from operating activity?

  1. A) $530 B) $600 C) $480 D) $580 E) $560

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

 

25)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13

 

28)          28)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The uses of cash include($ in millions):

 

  1. A) $70 from accounts receivable.

 

  1. B) $840 from fixed assets.

 

  1. C) $370 from inventory.

 

  1. D) $110 from notes payable.

 

  1. E) $1,075 from retained earnings.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

 

 

 

 

14

 

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

  1. A) Financial ratios.

 

  1. B) Scenario analysis.

 

  1. C) Comparison statements.

 

  1. D) Solvency analysis.

 

  1. E) Dimensional analysis.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

30)          Which one of the following measures indicates how long a firm can continue operating without any additional cash inflows?

  1. A) Interval measure

 

  1. B) Cash ratio

 

  1. C) Quick ratio

 

  1. D) Current ratio

 

  1. E) Total debt ratio

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

31)          Jeminson’s Hardware has accounts payable of $682, inventory of $3,608, cash of $340, fixed assets of $4,211, accounts receivable of $418, and long-term debt of $3,750. What is the value of the net working capital to total assets ratio?

  1. A) .37 B) .56 C) .47     D) .29    E) .43

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

 

29)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15

 

32)          Life Industries has sales of $46,230, costs of goods sold of $27,742.50, inventory of

 

$675, and accounts receivable of $2,300. How many days, on average, does it take Life Industries to sell the inventory and collect the payment on the sale?

 

  1. A) 28 days

 

  1. B) 20 days

 

  1. C) 00 days

 

  1. D) 67 days

 

  1. E) 04 days

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

33)          Freda’s, Inc. has sales of $3,200, current liabilities of $900, total assets of $3,000, and net working capital of $500. How many dollars’ worth of sales are generated from every $1 in net fixed assets?

  1. A) $2.00 B) $2.29 C) $.91  D) $1.67                E) $1.07

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

34)          The value of the current assets divided by the value of the current liabilities is called:

 

  1. A) Liquid ratio.

 

  1. B) Cash ratio.

 

  1. C) Net working capital.

 

  1. D) Current ratio.

 

  1. E) Quick ratio.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

32)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

34)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16

 

35)          Which ratio does not focus on turnover?

 

  1. A) Inventory turnover.

 

  1. B) Total asset turnover.

 

  1. C) Interval measure.

 

  1. D) Receivable turnover.

 

  1. E) Days’ sales in inventory.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

36)          Square D’s has $42,700 in sales and a profit margin of 7.2 %. There are 5,700 shares of stock outstanding at a market price per share of $13.20. What is the price-earnings ratio?

  1. A) 17.63 B) 7.12 C) 26.08                D) 29.00                E) 24.47

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

37)          A fixed asset turnover ratio of .72 means that:

 

  1. A) For every $1 in total assets, a firm can generate $0.72 in sales.

 

  1. B) For every $1 in total assets, a firm can generate $0.72 in net income.

 

  1. C) For every $1 in net fixed assets, a firm can obtain $0.72 in debt.

 

  1. D) For every $1 in net fixed assets, a firm can generate $0.72 in net income.

 

  1. E) For every $1 in net fixed assets, a firm can generate $0.72 in sales.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

38)          A source of cash is defined as:

 

  1. A) The change in a firm’s liquid accounts over a stated period of time.

 

  1. B) Any transaction which increases the value of an asset account.

 

  1. C) Any activity which brings in cash to the firm.

 

  1. D) Any activity which decreases the liabilities of a firm.

 

  1. E) Any statement of financial position account which increases in value.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

35)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36)

 

 

 

 

 

 

 

 

 

 

 

 

 

37)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38)

 

 

 

17

 

39) Chadwick, Inc., has 125,000 shares of stock outstanding, sales of $7.2 million, net       39)

income of $600,000, a price-earnings ratio of 22, and a book value per share of $36.30.

What is the market-to-book ratio?

  1. A) 2.43 B) 3.27 C) 1.87  D) 3.18  E) 2.91

Answer: E

Explanation:       A)

  1. B)
  2. C)
  3. D)
  4. E)

40)                                                                          40)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Which of Marble Comics’ liquidity measures increased from 2014 to 2015?

 

  1. A) Cash ratio

 

  1. B) NWC to total assets

 

  1. C) Interval measure

 

  1. D) Current ratio

 

  1. E) Quick ratio

 

Answer: A

Explanation:       A)

B)

C)

 

18

 

D)C)

E)

 

41) Taylor’s Men’s Wear has a debt-equity ratio of 55 %, sales of $587,000, net income of              41)

$63,400, and total debt of $196,000. What is the return on equity?

  1. A) 18.03 % B) 19.58 % C) 15.80 %           D) 19.41 %           E) 17.79 %

Answer: E

Explanation:       A)

  1. B)
  2. C)
  3. D)
  4. E)

42)                                                                          42)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What was the return on equity for 2015?

 

  1. A) 26.1% B) 44.8% C) 18.3%               D) 31.4%              E) 62.6%

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

19

 

43)          43)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If you were to prepare a statement of cash flows, what is the net cash flow from financing activities ($ in millions)?

  1. A) – $678 B) – $108 C) $3,003              D) $1,325             E) $15

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

 

 

 

 

 

 

 

 

 

 

20

 

44)          A supplier, who requires payment within ten days, is most concerned with which one of the following ratios when granting credit?

  1. A) quick

 

  1. B) current

 

  1. C) debt-equity

 

  1. D) total debt

 

  1. E) cash

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

45)          Calculate the return on assets given the following information: common shares outstanding = 250,000; earning per share = $2.00; total assets = $2,000,000; total equity = $800,000.

  1. A) 21% B) 22% C) 23%  D) 24%  E) 25%

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

46)          Calculate the value of long-term debt given the following information: total debt = $100,000; debt/equity ratio = 0.50; long-term debt ratio = 0.32.

  1. A) $78,000 B) $94,118 C) $74,000           D) $72,000           E) $76,000

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

44)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21

 

47) During the year, Doug’s Bakery decreased its accounts receivable by $50, increased its            47)

inventory by $100, and decreased its accounts payable by $50. For these three accounts,

the firm has a net:

  1. A) $100 use of cash.
  2. B) $200 use of cash.
  3. C) $200 source of cash.
  4. D) $100 source of cash.
  5. E) $0 use of cash.

Answer: A

Explanation:    A)

  1. B)
  2. C)
  3. D)
  4. E)

48)          48)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What is the equity multiplier for 2015?

 

  1. A) 0.29 B) 2.42 C) 1.52  D) 1.17  E) 0.66

 

Answer: C

Explanation:       A)

  1. B) 22

 

B)

C)

D)

E)

 

49)          The net working capital turnover ratio is measured as:

 

  1. A) Sales minus net working capital.

 

  1. B) Sales divided by net working capital.

 

  1. C) Net working capital divided by sales.

 

  1. D) Net working capital plus sales.

 

  1. E) Sales times net working capital.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

50)          Etling Eccentricities has 400,000 shares of common stock outstanding, net income after tax of $1.2 million, retained earnings of $17 million, and total equity of $35 million. What is EE’s earnings per share?

  1. A) $13.50 B) $3.00 C) $8.75                D) $4.25                E) $4.00

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

 

 

 

 

 

49)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23

 

51)          51)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The net cash from investment activity for 2015 is ($ in millions):

 

  1. A) -$1,030 B) -$840 C) $1,030              D) -$650               E) $840

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

 

 

 

 

 

 

 

 

 

 

24

 

52)          52)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The industry in which RTF Corporation operates has an industry average of 21% for earnings before taxes. In 2015 is RTF outperforming or underperforming the industry and why?

 

  1. A) Outperforming because RTF has an EBT of 21%.

 

  1. B) Underperforming because RTF has an EBT of 20%.

 

  1. C) Outperforming because RTF has an EBT of 19%.

 

  1. D) Underperforming because RTF has an EBT of 19%.

 

  1. E) Performing in line with the industry at 21%.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

 

 

 

 

25

 

53)          Qwik Stop has accounts receivable of $4,830, inventory of $9,083, sales of $38,600, and cost of goods sold of $21,400. How many days does it take the firm to both sell their inventory and collect the payment on the sale?

  1. A) 214 days B) 201 days C) 217 days         D) 186 days         E) 193 days

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

54)          In the most general sense, which of the following would you expect to be true?

 

  1. A) Changes in income and expense accounts do not affect sources and uses of funds.

 

  1. B) If fixed assets decrease by the amount of depreciation for the year, there is a net use of funds.

 

  1. C) If the common stock outstanding increases, there is a use of funds.

 

  1. D) If a current asset account and a current liability account both increase by the same amount, there is a net use of funds.

 

  1. E) If a liability account increases and an asset account decreases by the same amount, there is a net source of funds.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

55)          A decrease in which one of the following is a source of cash?

 

  1. A)

 

  1. B) Long-term debt.

 

  1. C) Notes payable.

 

  1. D) Common stock.

 

  1. E) Retained earnings.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

53)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

54)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

55)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

26

 

56)          Calculate the times interest earned ratio given the following information: depreciation expense = $30,000; EBIT = $180,000; cash coverage ratio = 14 times.

  1. A) 5 times

 

  1. B) 0 times

 

  1. C) 5 times

 

  1. D) 5 times

 

  1. E) 0 times

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

57)          A financial manager who needs to find out how long it will take before their firm runs out of cash if no further cash comes in should consider the ________.

  1. A) Net working capital to total assets ratio.

 

  1. B) Interval measure.

 

  1. C) Current ratio.

 

  1. D) Cash ratio.

 

  1. E) Quick ratio.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

58)          Curly Industries generated net income of $980 for the year. The depreciation expense was $120 and dividends paid were $250. The accounts payable decreased by $60, accounts receivable decreased by $20, inventory increased by $80, and net fixed assets increased by $360. What is the net cash flow from operating activity?

  1. A) $1,100 B) $950 C) $980 D) $940 E) $1,140

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

56)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

57)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

58)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27

 

59)          The financial ratio measured as total assets minus total equity, divided by total assets, is the:

  1. A) Times interest earned ratio.

 

  1. B) Total debt ratio.

 

  1. C) Equity multiplier.

 

  1. D) Current ratio.

 

  1. E) Debt-equity ratio.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

60)          Ajax Corporation’s total current assets are valued at $135,000 and are comprised of cash, accounts receivable and inventory. Determine the value of the cash account given the following information: sales = $800,000; cost of goods sold = $300,000; accounts receivable turnover = 32 times; inventory turnover = 10 times.

  1. A) $80,000 B) $70,000 C) $85,000           D) $90,000           E) $75,000

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

61)          A Toronto banker considering loaning money to a firm for ten years would most likely prefer the firm have a debt ratio of ________ and a times interest earned ratio of

 

________.

 

  1. A) .75; .75 B) .50; 1.00 C) .40; 2.50          D) .35; 3.00          E) .45; 1.75

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

59)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

60)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

61)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28

 

62)          A firm has a total debt ratio of .47. This means that that firm has 47 cents in debt for every:

  1. A) $1.00 in equity.

 

  1. B) $1.00 in total sales.

 

  1. C) $0.53 in equity.

 

  1. D) $0.53 in total assets.

 

  1. E) $1.00 in current assets.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

63)          If a firm is having difficulty controlling its operating expenses, the trouble will be most directly reflected in the firm’s ________ ratios.

  1. A) market value

 

  1. B) long-term solvency

 

  1. C) profitability

 

  1. D) asset management

 

  1. E) liquidity

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

64)          The higher the inventory turnover measure, the:

 

  1. A) Greater the amount of inventory held by a firm.

 

  1. B) Lesser the amount of inventory held by a firm.

 

  1. C) Faster a firm collects payment on its sales.

 

  1. D) Longer it takes a firm to sell its inventory.

 

  1. E) Faster a firm sells its inventory.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

 

62)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

63)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

64)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29

 

65)          The average length of time it takes for a customer to pay for his or her credit purchases is referred to as:

  1. A) The payables period.

 

  1. B) The interval measure.

 

  1. C) The receivables turnover.

 

  1. D) Days’ sales in receivables.

 

  1. E) The cash period.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

66)          A Kingston firm has sales of $49,800, costs of $36,100, interest paid of $380, and depreciation of $3,200. The tax rate is 35 %. What is the value of the cash coverage ratio?

  1. A) 41.08 B) 32.11 C) 36.05                D) 25.73                E) 30.00

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

67)          The ________ breaks down return on equity into three component parts: operating efficiency of the firm, its asset use efficiency, and financial leverage.

  1. A) Return on assets

 

  1. B) Du Pont identity

 

  1. C) Equity multiplier

 

  1. D) Statement of cash flows

 

  1. E) Asset turnover ratio

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

65)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

66)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

67)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30

 

68)          Common sized statements:

 

  1. A) Are useful in making comparisons.

 

  1. B) Depict the cash flows of a firm.

 

  1. C) Reflect the ratio analysis of a firm.

 

  1. D) Show the sources and uses of cash.

 

  1. E) Reflect the market value of a firm.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

69)          Activities of the firm that generate cash are known as:

 

  1. A) Sources of cash.

 

  1. B) Cash receipts.

 

  1. C) Cash payments.

 

  1. D) Uses of cash.

 

  1. E) Cash on hand.

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

70)          Gwen’s Pastry Shop has annual sales of $238,000, a profit margin of 6 %, and a return on assets of 7.7 %. The firm has ________ in total assets.

  1. A) $224,528 B) $185,455 C) $220,984         D) $176,067         E) $256,326

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

71)          Calculate net income given the following information: tax rate = 30%; times interest earned = 21 times; sales = $2,000; cost of goods sold = $800; general and administrative expenses = $150.

  1. A) $850 B) $800 C) $700 D) $750 E) $650

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

68)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

69)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

70)

 

 

 

 

 

 

 

 

 

 

 

 

 

71)

 

 

 

 

 

 

31

 

72)          Assume a firm’s current ratio equals 3.1. Which of the following actions would increase it?

  1. A) Receiving a full cash payment on an account receivable.

 

  1. B) Buying inventory on credit, thereby increasing accounts payable.

 

  1. C) Discarding and writing off spoiled inventory.

 

  1. D) Paying off a short-term bank loan with the proceeds from new long-term debt.

 

  1. E) Purchasing new fixed assets using the proceeds from a new stock issue.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

73)          Which of the following are considered a source of cash?

 

  1. A) Accounts receivable increase.

 

  1. B) Expenses increase.

 

  1. C) Common stock decreases.

 

  1. D) Accounts payable increase.

 

  1. E) Inventory increases.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

74)          Sales divided by the value computed as current assets minus current liabilities is referred to as the:

  1. A) Capital intensity ratio.

 

  1. B) Net working capital turnover.

 

  1. C) Total asset turnover.

 

  1. D) Cash coverage ratio.

 

  1. E) Equity multiplier.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

72)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

73)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

74)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32

 

75)          Which one of the following formulas represents an asset utilization ratio?

 

  1. A) Price per share/Earnings per share

 

  1. B) Sales/Net working capital

 

  1. C) Earnings before interest and taxes/Interest

 

  1. D) (Current assets – Inventory)/Current liabilities

 

  1. E) Net income/Total assets

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

76)          Larry’s Lounge has cash of $1,670, accounts receivable of $610, accounts payable of $2,900, and inventory of $3,690. What is the value of the quick ratio?

  1. A) .58 B) 2.06 C) .62     D) 2.13  E) .79

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

77)          Calculate net income given the following information: tax rate = 30%; accounts receivable = $15,000; receivable turnover = 6 times; inventory = $4,000; inventory turnover = 6.25 times; operating expenses = $15,000; interest expense = $9,000.

  1. A) $27,700 B) $28,700 C) $26,700           D) $29,700           E) $25,700

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

75)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

76)

 

 

 

 

 

 

 

 

 

 

 

 

 

77)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33

 

78)          78)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marble Comics’ times interest earned ratio is:

 

  1. A) 4.80 B) 1.95 C) 2.95  D) 0.34  E) 1.46

Answer: C

Explanation:       A)

  1. B)
  2. C)
  3. D)
  4. E)

79) A London Ontario firm has a net income of $32,000 which provides a 12% return on  79)

assets. The firm has a debt-equity ratio of .40. What is the return on equity?

  1. A) 7.20% B) 12.00% C) 16.80%            D) 8.57%              E) 11.67%

Answer: C

Explanation:       A)

  1. B)

 

C)

D)

E)

 

 

 

 

34

 

80) Danny Corporation’s total current assets are valued at $233,000 and are comprised of             80)

cash, accounts receivable and inventory. Determine the value of the cash account given

the following information: sales = $225,000; cost of goods sold = $135,000; accounts

receivable turnover = 3 times; inventory turnover = 1.5 times.

  1. A) $64,000 B) $60,000 C) $66,000           D) $68,000           E) $62,000

Answer: D

Explanation:       A)

  1. B)
  2. C)
  3. D)
  4. E)

81)                                                                          81)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If Young stock sells for $40 and there are 100 million shares outstanding, what is the P/E ratio($ in millions)?

  1. A) 25.64 B) 10.26 C) 32.49                D) 11.02                E) 5.68

 

Answer: D

Explanation:       A)

B)

 

35

 

CB)

D)

E)

 

82)          Gateway Lodging has annual sales of $1.22 million, total debt of $380,000, total equity of $750,000, and a profit margin of 7.45 %. What is the return on assets?

  1. A) 7.78 % B) 7.56 % C) 6.97 %              D) 8.04 %             E) 7.13 %

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

83)          The quick ratio is measured as:

 

  1. A) Current liabilities divided by current assets, plus inventory.

 

  1. B) Cash on hand plus current liabilities, divided by current assets.

 

  1. C) Current assets minus inventory minus current liabilities.

 

  1. D) Current assets divided by current liabilities.

 

  1. E) Current assets minus inventory, divided by current liabilities.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

84)          Hilton Publishing and Jordan Publishing have identical debt-equity ratios and profit margins. However, Hilton’s ROA is higher than Jordan’s. Therefore, it must be true that:

  1. A) Jordan’s ROE is higher than Hilton’s.

 

  1. B) Hilton’s operating efficiency is higher than Jordan’s.

 

  1. C) Hilton has a lower investment in total assets than Jordan does.

 

  1. D) Hilton has a lower total asset turnover ratio.

 

  1. E) Hilton uses its assets more efficiently to generate sales.

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

 

 

 

 

 

82)

 

 

 

 

 

 

 

 

 

 

 

 

 

83)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

84)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

36

 

85)          85)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The profit margin of Marble Comics Group is:

 

  1. A) 19.9% B) 13.1% C) 9.8% D) 3.6% E) 22.3%

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37

 

86)          In a common size statement, the statement of financial position may be expressed as a percentage of ________ while the statement of comprehensive income may be expressed as a percentage of ________.

 

  1. A) liabilities; sales

 

  1. B) liabilities plus equity; sales

 

  1. C) sales; liabilities plus equity

 

  1. D) liabilities plus equity; net income

 

  1. E) assets; net income

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

87)          The following statement of financial position and statement of comprehensive income should be used.

 

 

 

86)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

87)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

38

 

Woodburn, Inc. has a profit margin of ________ %, a total asset turnover of ________, an equity multiplier of ________, and a return on equity of ________ %. (Use 2015 values.)

  1. A) 18.89%; 1.07; 1.68; 33.94%
  2. B) 18.89%; .93; .60; 10.55%
  3. C) 16.97%; .93; .60; 9.48%
  4. D) 18.89%; 21; 1.73; 39.56%
  5. E) 16.97%; 07; 1.68; 30.52%

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

88) The sales of SportCheck have increased recently and inventory has declined slightly. A           88)

financial analyst would expect to find that the:

 

  1. A) Inventory turnover has decreased and the days’ sales in inventory has decreased.

 

  1. B) Inventory turnover has increased and the days’ sales in inventory has decreased.

 

  1. C) Inventory turnover has decreased and the days’ sales in inventory has increased.

 

  1. D) Inventory turnover has increased and the days’ sales in inventory has increased.

 

  1. E) Quick ratio has decreased and the current ratio has increased.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

89)          Which of the following is NOT incorporated into the calculation of the Du Pont identity?   89)

 

  1. A) Receivables turnover

 

  1. B) Equity multiplier

 

  1. C) Return on assets

 

  1. D) Total asset turnover

 

  1. E) Profit margin

 

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

 

 

 

 

 

 

 

 

 

39

 

90)          Calculate the current ratio given the following information: current liabilities = $40,000; sales = $90,000; cost of goods sold = $32,000; cash ratio = 1.10; accounts receivable turnover = 5; inventory turnover = 3.

  1. A) 1.60 B) 1.70 C) 1.80  D) 1.90  E) 2.00

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

91)          Use the following statement of financial position and statement of comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What is the return on equity for Bluebird for 2015?

 

  1. A) 27.03 % B) 26.98 % C) 28.00 %           D) 27.63 %           E) 27.59 %

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

90)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

91)

 

 

 

40

 

92)          92)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

What is the cash coverage ratio for 2015?

 

  1. A) 5.2 B) 8.7 C) 6.8     D) 9.7    E) 9.2

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

 

 

 

 

 

 

 

 

 

 

 

 

41

 

93)          Which of the following is a use of cash?

 

  1. A) A reduction in inventory.

 

  1. B) An increase in retained earnings.

 

  1. C) An increase in accounts receivable.

 

  1. D) An increase in accounts payable.

 

  1. E) An increase in notes payable.

 

Answer: C

Explanation:       A)

B)

C)

D)

E)

 

94)          Calculate sales given the following data. Total fixed assets $400,000; long-term liabilities $155,000; total liabilities $280,000; total shareholders’ equity $320,000; net working capital turnover 20.

 

  1. A) $1,700,000

 

  1. B) $1,500,000

 

  1. C) $1,900,000

 

  1. D) $2,250,000

 

  1. E) $2,100,000

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

95)          Katrina’s Fury has $697,400 in sales. The profit margin is 3.4 % and the firm has 12,500 shares of stock outstanding. The market price per share is $33. What is the price-earnings ratio?

  1. A) 16.2 B) 16.6 C) 15.8  D) 17.1  E) 17.4

 

Answer: E

Explanation:       A)

B)

C)

D)

E)

 

96)          Ajax Company has a debt-equity ratio of 0.75. Return on assets is 9.5 %. What is the return on equity?

  1. A) 16.63% B) 15.75% C) 13.37%            D) 12.69%            E) 14.48%

 

Answer: A

Explanation:       A)

B)

C)

D)

E)

 

 

93)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

94)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

95)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

96)

 

 

 

42

 

97)          Earnings before interest and taxes divided by the interest paid is called the:

 

  1. A) Interval measure.

 

  1. B) Cash coverage ratio.

 

  1. C) Debt-equity ratio.

 

  1. D) Times interest earned ratio.

 

  1. E) Debt-earnings ratio.

 

Answer: D

Explanation:       A)

B)

C)

D)

E)

 

98)          The financial ratio measured as EBIT plus depreciation, divided by interest expense, is the:

  1. A) Times interest earned ratio.

 

  1. B) Cash coverage ratio.

 

  1. C) Total debt ratio.

 

  1. D) Debt-equity ratio.

 

  1. E) Gross margin.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

97)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

98)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

43

 

99)          99)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

If the firm is currently carrying a price/earnings ratio of 2, what is the firm’s approximate market price per share?

  1. A) $78 B) $56 C) $8      D) $129 E) $11

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

 

 

 

 

 

 

 

 

 

 

 

 

44

 

100) The long-term debt ratio is probably of most interest to a firm’s:     100)

  1. A) Credit customers.

 

  1. B) Debt holders.
  2. C) Employees.
  3. D) Shareholders.
  4. E) Suppliers.

 

Answer: B

Explanation:       A)

B)

C)

D)

E)

 

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.

 

101) A firm has days’ sales in inventory of 105 days, an average collection period of          101)

35 days, and takes 42 days, on average, to pay its accounts payable. Taken together, what do these three figures imply about the firm’s operations and its cash flows?

 

Answer: It takes, on average, 105 days to sell inventory once it is purchased by the firm, then it takes another 35 days to collect on the receivables. Thus, the firm must finance the inventory and receivables for 140 days. The first 42 days are financed with payables, on average, leaving 98 days’ worth of inventory and receivables that it must finance using other sources. In terms of cash flow, the average cash outflow occurs 42 days after inventory is purchased while the average cash inflow occurs 98 days later, 140 days after the inventory is purchased.

 

Explanation:

 

102) Without making reference to its formula, provide a definition of “accounts                102)

receivable turnover.”

 

 

Answer: A ratio used to examine the effectiveness of extending credit and collecting debts. The ratio measures how efficiently a firm uses its assets.

Explanation:

 

103) Without making reference to its formula, provide a definition of “return on               103)

assets.”

 

 

Answer: The ratio provides an indication of management’s effectiveness at utilizing its assets to generate earnings. The ratio also indicates company profitability a company is compared to its total assets.

Explanation:

 

 

 

 

 

 

 

 

 

 

45

 

104)       Without making reference to its formula, provide a definition of “cash ratio.”     104)

Answer: The cash ratio measures the amount of cash and cash equivalents that is

available to meet current liabilities. The calculated value of the ratio

determines the amount of cash and cash equivalents available for every $1

of current liabilities.

Explanation:

105)       Assume that your firm has a positive cash balance and that the cash balance is   105)

increasing each year. Why then is it important to analyze a statement of cash

flows?

 

 

Answer: It is possible that the increase in the cash flows is a result of issuing more equity or assuming more debt and not the result of generating cash from operations. If a firm cannot generate positive cash flows internally, the firm will eventually encounter difficulties in raising external funds and will most likely encounter financial difficulties and possibly face bankruptcy.

 

Explanation:

 

106)       The financial manager of ABC, Inc. would like to somehow do a comparison of financial statements to determine how ABC, Inc. is performing both historically and competitively. Develop and explain a plan for performing these comparisons.

 

Answer: The simplest way to do comparison analysis is to use common-size statements. For a historical comparison, common size statements for several of the past months, quarters and/or years can be compared to ascertain what trends are developing. The common-size statement for the firm can be compared to industry averages or other comparable firms to

 

gather an overview of the competitive environment.

 

Explanation:

 

107)       Dun & Bradstreet Canada publishes peer group financial information for a host of industries, yet the numbers typically only appear in common-size form. Why not report average dollar amounts instead?

 

Answer: The common-size numbers are inherently more useful since they can be directly compared to the financial statements of any firm. If average dollar figures were presented, these numbers would have to be converted to common-size numbers to facilitate comparisons. Plus, since D&B Canada also publishes average sales and average total assets, the user can always work backwards to figure out the dollar amounts represented by each

 

category.

 

Explanation:

 

 

 

106)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

107)

 

 

 

 

 

 

 

 

 

 

 

 

46

 

108) What is a more meaningful measure of profitability for a firm, return on assets or   108)

return on equity? Why?

Answer: Most would argue ROE since it measures returns relative to the amount of

money shareholders have invested in the firm. In addition, since

shareholder wealth maximization is a firm’s primary goal, it makes more

sense to look at this measure.

Explanation:

109) Without making reference to its formula, provide a definition of “fixed asset            109)

turnover.”

Answer: A measure of a company’s ability to generate net sales from its investments

in capital assets. A higher fixed-asset turnover ratio indicates that a firm

has been effective in exploiting its capital assets to generate revenues.

Explanation:

110) Explain the types of activities that are shown on a statement of cash flows?              110)

Answer: The statement of cash flows is partitioned into three segments: operating

activities views cash flows from daily operations; Investing activities focus

on purchase or sale of long-term capital assets and investments, while

financing activities categorizes cash flows that result from issuance and

repurchase of shares and bonds along with receipts or payment of

dividends.

Explanation:

111) Without making reference to its formula, provide a definition of “days’ sales in        111)

inventory.”

 

 

Answer: A measure of a company’s inventory performance by determining how long it takes a company to convert its inventory into sales. Alternatively, one can consider how long an item sit idle on the “shelf” before it is sold. This measure varies from industry to industry, but normally, the shorter the value the better.

 

Explanation:

 

112) Suppose you calculated the following ratio for a firm: The sum of the            112)

compensation paid to owners, directors, and managers, divided by total sales. Which class of financial ratios should this be included in and why? Who might be interested in such a ratio?

 

Answer: This doesn’t fit well into any of the five categories presented in the book although it would most likely be included as a profitability ratio because it is a measure of how much of each dollar in sales is used to pay these salaries. The ratio would likely be important to all of the three groups (owners, directors, managers) included in the ratio, plus it would likely be important to lenders as a measure of how much of the firm’s income these groups draw out of the business.

Explanation:

 

 

47

 

113) What are the benefits of developing common size financial statements?     113)

 

 

Answer: Common-size financial statements are developed to display line items as a percentage of a selected figure. Common-size financial statements enable investors to evaluate a company over time, compare it with competitors, or spot trends.

Explanation:

 

114)       Provide a list of the top ten stakeholders that will find financial statement            114)

analysis useful.

Answer: Creditors, fund managers, investors, internal division managers, senior

corporate officers, employees, government agencies, tax agencies, unions,

suppliers,

Explanation:

115)       It is often said that anyone with a pencil can calculate financial ratios, but it takes              115)

a brain to interpret them. What kinds of things should the analyst keep in mind

when evaluating the financial statements of a given firm?

 

 

Answer: This question is open-ended, and allows students to call into play knowledge gleaned from other courses, this course, and personal experience.

Explanation:

 

116)       Prepare common-size statement of financial positions for Marble Comics using the 116) data below. Comment on the firm’s liquidity.

 

 

Marble Comics Group

Statement of financial positions

Years ended 2014 and 2015

($ in millions)

Assets   2014       2015       Liab. and Equity                2014       2015

Current Assets                                  Current Liabilities

 

Cash      $ 105      $ 110      Accounts Payable            $ 64        $ 66

Accounts Receivable      106         137         Notes Payable   50                           35

Inventory            140         122         Total      114                         101

Total      351         369         Long-Term Debt               87                           86

Fixed Assets       89           78           Common Stock 55                           55

Retained Earnings            184                         205

Total Assets        $ 440      $ 447      Total Liab. and OE            $ 440      $ 447

 

 

 

 

 

 

 

 

 

 

 

48

 

Answer: This is a relatively straightforward exercise to test the students’ ability to construct a common-size statement of financial position. In terms of liquidity, both cash and AR increased as a percent of total assets, (while inventory decreased, indicating the firm’s liquidity is on the increase) In addition, total CA increased and total CL decreased as a percent of total assets, again increasing the firm’s liquidity.

 

 

Marble Comics Group

Common-Size Statement of financial positions

Years ended 2014 and 2015

Assets   2014       2015       Liab. and Equity                2014       2015

Current Assets                                  Current Liabilities

 

Cash      23.9%    24.6%    Accounts Payable            14.5%    14.8%

Accounts Receivable      24.1        30.6        Notes Payable   11.4                        7.8

Inventory            31.8        27.3        Total      25.9                        22.6

Total      79.8%    82.5        Long-Term Debt               19.8                        19.2

Fixed Assets       20.2        17.5        Common Stock 12.5                        12.3

Retained Earnings            41.8                                        45.9

Total Assets        100.0%  100.0%  Total Liab. and OE            100.0%  100.0%

Explanation:

117) If shareholders could only have access to two financial ratios for a firm, which           117)

two ratios presented in this chapter do you think they would select to review and

why?

 

Answer: Student answers will vary but will most likely include the return on equity, the price-earnings ratio, or the market-to-book ratio. Students should explain the value of the ratios they select.

Explanation:

 

118) Describe some of the problems that are encountered when comparing the               118)

financial statements of various firms.

 

 

Answer: Student answers should include some of the following problems: the difficulty in classifying a firm into a particular industry especially if the firm is a conglomerate; the geographic dispersion of firms; the differences in accounting methods in various countries; the differences in accounting methods within the same country; differences in regulatory requirements and the financial effects of those requirements; different seasonality effects; and one-time events.

 

Explanation:

 

 

 

 

 

 

 

49

 

119)       The Vice President of Finance of Alpha, Inc. wants to improve the current ratio on the company’s next financial statement. Explain what he/she can legitimately do now to help accomplish this goal. Provide specific examples in your answer.

 

Answer: Some examples of actions that could be taken to improve the current ratio include:

 

  1. Selling long-term assets either for cash or on account.

 

  1. Using cash to reduce current liabilities.

 

  1. Acquiring long-term financing for current assets.

 

  1. Selling inventory at a profit.

 

  1. Converting short-term debt to long-term debt.

 

Explanation:

 

120)       Create a common size statement for the financial statements below.

 

 

 

119)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

120)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50

 

Answer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Explanation:

 

121) What factors might make the comparison of the financial statements between two 121) firms in the same industry difficult?

 

 

Answer: Factors may include: if the size of the two firms’ operations are different, or whether the firms’ financial statements are prepared using different fiscal year-ends.

Explanation:

 

122) Explain the value provided by the Du Pont identity that is not provided by just         122)

knowing the return on equity percentage.

 

 

Answer: The Du Pont identity consists of the equity multiplier, the total asset turnover, and the profit margin. These values reveal the amount of assets that can be controlled for every $1 of equity invested in the firm, the number of sales generated from every $1 of assets, and the amount of profit earned from every $1 of sales. This provides an insight into the financial leverage employed, the efficiency with which the assets are utilized, and the control over the operating costs.

 

Explanation:

 

 

 

 

 

 

 

 

51

 

123) Discuss what the market to book ratio attempts to accomplish.        123)

 

 

Answer: The market-to-book ratio attempts to recognize value generating firms. A value less than 1 could mean that the firm has not been successful overall in creating value for its shareholders.

Explanation:

 

124) List and interpret three liquidity ratios.         124)

Answer: Choose any three of:

 

 

1)            Current ratio: the firm’s ability to meet its financial obligations as they come due over the coming year,

 

2)            Quick ratio: the firm’s ability to meet its near-term financial obligations,

 

3)            Cash ratio: the firm’s ability to meet its near-term financial obligations without depending on the liquidation of inventory or accounts receivable,

 

4)            Net working capital to total assets: The firm’s investment in NWC for each dollar of assets, and

 

5)            Interval measure: The amount of time a firm can operate if no further sales are made.

Explanation:

 

125) Without making reference to its formula, provide a definition of “average  125)

collection period.”

 

 

Answer: A measure of a company’s accounts receivable performance by determining how long it takes a company to convert its accounts receivable into cash. This measure varies from industry to industry, but normally, the shorter the collection period indicates that the accounting and finance department are in control of their credit and collections policies.

Explanation:

 

126) Without making reference to its formula, provide a definition of “current ratio.”      126)

 

 

Answer: The current ratio is a financial ratio that compares a firm’s current assets to its current liabilities to determine whether it has sufficient current resources to pay its current debt obligations. The calculated value of the ratio determines the amount of current assets available for every $1 of current liabilities.

 

Explanation:

 

127) Without making reference to its formula, provide a definition of “inventory               127)

turnover.”

 

 

Answer: A ratio that examines the number of times a firm’s inventory is sold and replaced over a period of time.

Explanation:

 

 

 

 

 

 

 

52

 

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.

 

128) The most effective methods of directly evaluating the financial performance of a firm is      128)

to compare the current financial ratios to those of the same firm from prior time periods

and compare a firm’s financial ratios to those of other firms in the firm’s peer group who

have similar operations.

Answer:True      False

Explanation:

 

 

129) Days’ sales in inventory of car dealerships are generally lower when compared to grocery   129)

 

stores.

 

 

Answer:               True        False

Explanation:

 

130)       If a firm uses cash to purchase inventory, its quick ratio will increase.      130)

Answer:               True       False

Explanation:

131)       Payment of a note payable and repurchase of common stock are uses of cash.  131)

Answer:               True       False

Explanation:

132)       An increase in long-term debt is source of cash.                132)

Answer:               True       False

Explanation:

133)       Common size statements can only be completed on the statement of comprehensive   133)

income and statement of financial position.

Answer:               True       False

Explanation:

134)       A poor industry outlook along with low investor opinion of the firm are most apt to         134)

cause a firm to have a higher price-earnings ratio.

Answer:               True       False

Explanation:

135)       Days’ sales in inventory of grocery stores are generally higher when compared to car      135)

dealerships.

Answer:               True       False

Explanation:

136)       If a firm has only current assets and no fixed assets of any kind, its times interest earned              136)

ratio must exceed its cash coverage ratio.

Answer:               True       False

 

Explanation:

 

 

 

 

 

 

53

 

137) When comparing the financial statements of one firm with those of another firm, a               137)

problem that may be encountered is that the two firms may be seasonal in nature and

have different fiscal year ends.

Answer:True      False

Explanation:

 

 

138)       If a firm uses part of the cash it received from payment of an account receivable to buy                138)

inventory and leaves the rest in its bank account, its current ratio will remain unchanged.

Answer:               True       False

Explanation:

139)       When comparing the financial statements of one firm with those of another firm, a        139)

problem that may be encountered is that the operations of the two firms may vary

geographically.

Answer:               True       False

Explanation:

140)       When comparing the financial statements of one firm with those of another firm, a        140)

problem that may be encountered is that the firms may use differing accounting methods

for inventory purposes.

Answer:               True       False

Explanation:

141)       The equity multiplier, the profit margin and the total asset turnover are the three parts of           141)

the Du Pont identity.

Answer:               True       False

 

Explanation:

 

 

142)       Due to the difficulty of access the true enterprise value, one can use the market cap as a proxy for enterprise value to calculate the EV/EBITDA ratio.

 

Answer:    True  False

Explanation:

 

143)       The statement of cash flows cannot be standardized.

 

Answer:               True        False

Explanation:

 

144)       Days’ sales in inventory of grocery stores are generally lower when compared to car dealerships.

 

Answer:    True  False

Explanation:

 

145)       Days’ sales in inventory of car dealerships are generally higher when compared to grocery stores.

 

Answer:    True  False

Explanation:

 

 

142)

 

 

 

 

 

 

143)

 

 

 

 

 

144)

 

 

 

 

 

 

145)

 

 

 

 

54

 

146)       Another name for return on equity is return on total capitalization.

 

Answer:               True        False

Explanation:

 

147)       When comparing the financial statements of one firm with those of another firm, a problem that may be encountered is that either one, or both, of the firms may be conglomerates and thus have unrelated lines of business.

 

Answer:    True  False

Explanation:

 

 

146)

 

 

 

 

 

147)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

55

 

Answer Key

 

Testname: C3

 

 

 

1)            A

2)            E

3)            B

4)            E

5)            E

6)            B

7)            D

8)            E

9)            A

10)          C

11)          A

12)          A

13)          A

14)          E

15)          E

16)          D

17)          A

18)          E

19)          D

20)          D

21)          A

22)          E

23)          C

24)          A

25)          D

26)          A

27)          E

28)          B

29)          A

30)          A

31)          E

32)          E

33)          A

34)          D

35)          C

36)          E

37)          E

38)          C

39)          E

40)          A

41)          E

42)          A

43)          E

44)          E

45)          E

46)          B

47)          A

48)          C

49)          B

50)          B

 

 

56

 

Answer Key

 

Testname: C3

 

 

 

51)          A

52)          D

53)          B

54)          E

55)          A

56)          E

57)          B

58)          C

59)          B

60)          A

61)          D

62)          C

63)          C

64)          E

65)          D

66)          C

67)          B

68)          A

69)          A

70)          B

71)          C

72)          D

73)          D

74)          B

75)          B

76)          E

77)          B

78)          C

79)          C

80)          D

81)          D

82)          D

83)          E

84)          E

85)          C

86)          B

87)          A

88)          B

89)          A

90)          C

91)          D

92)          D

93)          C

94)          B

95)          E

96)          A

97)          D

98)          B

99)          B

100)       B

 

 

57

 

Answer Key

 

Testname: C3

 

 

 

101)       It takes, on average, 105 days to sell inventory once it is purchased by the firm, then it takes another 35 days to collect on the receivables. Thus, the firm must finance the inventory and receivables for 140 days. The first 42 days are financed with payables, on average, leaving 98 days’ worth of inventory and receivables that it must finance using other sources. In terms of cash flow, the average cash outflow occurs 42 days after inventory is purchased while the average cash inflow occurs 98 days later, 140 days after the inventory is purchased.

 

102)       A ratio used to examine the effectiveness of extending credit and collecting debts. The ratio measures how efficiently a firm uses its assets.

 

103)       The ratio provides an indication of management’s effectiveness at utilizing its assets to generate earnings. The ratio also indicates company profitability a company is compared to its total assets.

104)       The cash ratio measures the amount of cash and cash equivalents that is available to meet current liabilities. The calculated value of the ratio determines the amount of cash and cash equivalents available for every $1 of current liabilities.

105)       It is possible that the increase in the cash flows is a result of issuing more equity or assuming more debt and not the result of generating cash from operations. If a firm cannot generate positive cash flows internally, the firm will eventually encounter difficulties in raising external funds and will most likely encounter financial difficulties and possibly face bankruptcy.

 

106)       The simplest way to do comparison analysis is to use common-size statements. For a historical comparison, common size statements for several of the past months, quarters and/or years can be compared to ascertain what trends are developing. The common-size statement for the firm can be compared to industry averages or other comparable firms to gather an overview of the competitive environment.

 

107)       The common-size numbers are inherently more useful since they can be directly compared to the financial statements of any firm. If average dollar figures were presented, these numbers would have to be converted to common-size numbers to facilitate comparisons. Plus, since D&B Canada also publishes average sales and average total assets, the user can always work backwards to figure out the dollar amounts represented by each category.

 

108)       Most would argue ROE since it measures returns relative to the amount of money shareholders have invested in the firm. In addition, since shareholder wealth maximization is a firm’s primary goal, it makes more sense to look at this measure.

 

109)       A measure of a company’s ability to generate net sales from its investments in capital assets. A higher fixed-asset turnover ratio indicates that a firm has been effective in exploiting its capital assets to generate revenues.

 

110)       The statement of cash flows is partitioned into three segments: operating activities views cash flows from daily operations; Investing activities focus on purchase or sale of long-term capital assets and investments, while financing activities categorizes cash flows that result from issuance and repurchase of shares and bonds along with receipts or payment of dividends.

 

111)       A measure of a company’s inventory performance by determining how long it takes a company to convert its inventory into sales. Alternatively, one can consider how long an item sit idle on the “shelf” before it is sold. This measure varies from industry to industry, but normally, the shorter the value the better.

 

 

 

 

58

 

Answer Key

 

Testname: C3

 

 

 

112)       This doesn’t fit well into any of the five categories presented in the book although it would most likely be included as a profitability ratio because it is a measure of how much of each dollar in sales is used to pay these salaries. The ratio would likely be important to all of the three groups (owners, directors, managers) included in the ratio, plus it would likely be important to lenders as a measure of how much of the firm’s income these groups draw out of the business.

 

113)       Common-size financial statements are developed to display line items as a percentage of a selected figure. Common-size financial statements enable investors to evaluate a company over time, compare it with competitors, or spot trends.

 

114)       Creditors, fund managers, investors, internal division managers, senior corporate officers, employees, government agencies, tax agencies, unions, suppliers,

115)       This question is open-ended, and allows students to call into play knowledge gleaned from other courses, this course, and personal experience.

116)       This is a relatively straightforward exercise to test the students’ ability to construct a common-size statement of financial position. In terms of liquidity, both cash and AR increased as a percent of total assets, (while inventory decreased, indicating the firm’s liquidity is on the increase) In addition, total CA increased and total CL decreased as a percent of total assets, again increasing the firm’s liquidity.

 

 

Marble Comics Group

Common-Size Statement of financial positions

Years ended 2014 and 2015

Assets   2014       2015       Liab. and Equity                2014       2015

Current Assets                                  Current Liabilities

 

Cash      23.9%    24.6%    Accounts Payable            14.5%    14.8%

Accounts Receivable      24.1        30.6        Notes Payable   11.4                        7.8

Inventory            31.8        27.3        Total      25.9                        22.6

Total      79.8%    82.5        Long-Term Debt               19.8                        19.2

Fixed Assets       20.2        17.5        Common Stock 12.5                        12.3

Retained Earnings            41.8                        45.9

Total Assets        100.0%  100.0%  Total Liab. and OE

100.0%  100.0%

 

117)       Student answers will vary but will most likely include the return on equity, the price-earnings ratio, or the market-to-book ratio. Students should explain the value of the ratios they select.

118)       Student answers should include some of the following problems: the difficulty in classifying a firm into a particular industry especially if the firm is a conglomerate; the geographic dispersion of firms; the differences in accounting methods in various countries; the differences in accounting methods within the same country; differences in regulatory requirements and the financial effects of those requirements; different seasonality effects; and one-time events.

 

 

 

 

 

 

59

 

Answer Key

 

Testname: C3

 

 

 

119)       Some examples of actions that could be taken to improve the current ratio include:

 

  1. Selling long-term assets either for cash or on account.

 

  1. Using cash to reduce current liabilities.

 

  1. Acquiring long-term financing for current assets.

 

  1. Selling inventory at a profit.

 

  1. Converting short-term debt to long-term debt.

 

120)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

121)       Factors may include: if the size of the two firms’ operations are different, or whether the firms’ financial statements are prepared using different fiscal year-ends.

122)       The Du Pont identity consists of the equity multiplier, the total asset turnover, and the profit margin. These values reveal the amount of assets that can be controlled for every $1 of equity invested in the firm, the number of sales generated from every $1 of assets, and the amount of profit earned from every $1 of sales. This provides an insight into the financial leverage employed, the efficiency with which the assets are utilized, and the control over the operating costs.

123)       The market-to-book ratio attempts to recognize value generating firms. A value less than 1 could mean that the firm has not been successful overall in creating value for its shareholders.

 

 

 

 

 

 

 

60

 

Answer Key

 

Testname: C3

 

 

 

124)       Choose any three of:

 

1)            Current ratio: the firm’s ability to meet its financial obligations as they come due over the coming year,

 

2)            Quick ratio: the firm’s ability to meet its near-term financial obligations,

 

3)            Cash ratio: the firm’s ability to meet its near-term financial obligations without depending on the liquidation of inventory or accounts receivable,

 

4)            Net working capital to total assets: The firm’s investment in NWC for each dollar of assets, and

 

5)            Interval measure: The amount of time a firm can operate if no further sales are made.

 

125)       A measure of a company’s accounts receivable performance by determining how long it takes a company to convert its accounts receivable into cash. This measure varies from industry to industry, but normally, the shorter the collection period indicates that the accounting and finance department are in control of their credit and collections policies.

 

126)       The current ratio is a financial ratio that compares a firm’s current assets to its current liabilities to determine whether it has sufficient current resources to pay its current debt obligations. The calculated value of the ratio determines the amount of current assets available for every $1 of current liabilities.

 

127)       A ratio that examines the number of times a firm’s inventory is sold and replaced over a period of time.