Corporate Finance Exam 1

True or False: Most firms today have in place strong codes of ethical behavior, yet there are no obvious answers for many of the ethical questions facing many companies.
Click the card to flip 👆
1 / 88
Terms in this set (88)
True or False: Most firms today have in place strong codes of ethical behavior, yet there are no obvious answers for many of the ethical questions facing many companies.
True
A basic concept in finance says that investors who dislike risk (they are risk averse) will take on financial risk only if they:
expect to receive a fair return for the risk taken.
Net operating profit after taxes:
is the amount of profit a firm would generate if it had no debt and held no nonoperating assets
When using ratio analysis you are most likely to compare your company's ratios with:
those of companies in similar industries.
True or False: Increasing a firms return on common equity will definitely increase the stockholders wealth.
False
Prices for capital:
change in response to shifts in supply and demand conditions
If the yield curve is downward sloping, what is the yield to maturity on a 10-year Treasury coupon bond, relative to that on a 1-year T-bond?
The yield on the 10-year bond is less than the yield on a 1-year bond.
To determine the current value of a firm, investors must:
estimate future cash flow amounts
estimate when cash flows will occur
assess the firm's risk
all of the above
Free cash flow is:
equal to cash available for distribution to investors after the company has made all investments in fixed assets, new products, and working capital necessary to sustain ongoing operations.
Which of the following statements is most correct?
Many large firms operate different divisions in different industries, and this makes it hard to develop a meaningful set of industry benchmarks for these types of firms.
Financial ratios should be interpreted with caution because seasonal and accounting differences can reduce the comparability of ratios.
Financial ratios should be interpreted with caution because it may be difficult to say with certainty what is a "good" value. For example, in the case of the current ratio, a "good" value is neither high nor low.
Ratio analysis facilitates comparisons by standardizing numbers.
All of the statements above are correct.
What are generally used as comparison norms when analyzing financial ratios? the past ratios of the firm itself the average (median) ratios for firms in the same industry (and/or the ratios for other firms in the same industry)Both answer 1 and answer 2.The examination of ratios over time is called:trend analysisA large liquidity premium:is required for assets that cannot be converted into cash on short notice at a reasonable price.The NASDAQ is primarilyan over-the-counter market.True or False: Socially responsible actions that increase costs may have to be put on a mandatory basis.TrueWhich of the following actions are likely to reduce agency conflicts between stockholders and managers?Increasing the threat of corporate takeover.The concept of the time value of money generally implies that:a dollar today is worth more than a dollar in the futureThe primary contribution of finance to total social welfare is its:Contribution to the efficient allocation and use of resources.Which of the following represents a significant disadvantage to the corporate form of organization?Exposure to taxation of corporate earnings and stockholder dividend income.True or False: Many actions that help a firm increase the price of its stock also benefit society at large.TrueTrue or False: The managers should always undertake actions that result in a transfer of wealth from bondholders to stockholders.FalseMechanisms used to motivate managers to act in shareholders best interests include: managerial compensation direct intervention by shareholders the threat of firing the threat of takeoversall of the aboveA basic concept in finance says that investors will take on financial risk if:they view the return as adequate relative to the riskFinance indicates that the primary goal of a publicly-owned firm interested in serving its stockholders should be to:maximize shareholder wealth (or maximize stock price).Which of the following are among the three main areas of finance? financial institutions investments financial managementall of the above are correctIn finance we say that: cash flow is more important than "profit" the amount of useable funds in your hands is more important that the "profit" shown incremental cash flows added to a firm by a project are more important than the "profit" addedall of the above are correctOne reason that the value of most businesses is maximized if they are organized as a corporation is that:it is easier to transfer ownership of a corporation (corporations are more liquid assets).True or False: Managerial actions are the only determinant of a firms stock value.FalseIn financial management the primary agency relationships are those between: stockholders and managers managers and debtholders managers with similar levels of authority within the firma and bWhich of the following could explain why a business might choose to organize as a corporation rather than as a sole proprietorship or a partnership?Corporations generally find it easier to raise capital.Which of the following factors tend to encourage management to pursue stock price maximization as a goal? Shareholders link managements compensation to company performance. Managers reactions to the threat of firing and hostile takeovers.Statements a and b are both correct.One disadvantage of the sole proprietorship form of organization is that there is:unlimited liability.True or False: If the firm maximizes EPS, it will maximize stockholder wealth.FalseTrue or False: Most firms today have in place strong codes of ethical behavior, yet there are no obvious answers for many of the ethical questions facing many companiesTrueAn example of a primary market transaction is:buying 100 shares of a new issue of Home Depot common stockWhich of the following is likely to lead to an increase in the cost of funds?Households increase the amount of money they borrow from their local banks.Assume that inflation is expected to steadily decline in the years ahead, but that the real risk-free rate, k*, is expected to remain constant. Which of the following statements is most correct?If the expectations theory holds, the Treasury yield curve must be downward sloping.The real risk-free rate of interest is:changes over time depending on economic conditionsThe inflation premium:should be an average of the inflation rate expected over the life of the security.The New York Stock Exchange (NYSE) is:a secondary market.Investment banking firms: facilitate the issue of new securities. are secondary market participants. are primary market participants.a and c are trueTrue or False: The NYSE does not exist as a physical location; rather it represents a loose collection of dealers who trade stock electronically.FalseThe default risk premium:is the difference between the interest rate on a U.S. Treasury bond and a corporate bond of equal maturity and marketabilityFinancial intermediaries:facilitate the transfer of funds from savers to demanders of capitalMoney markets are:markets for short-term, highly liquid debt securities.Holmes Aircraft recently announced an increase in its net income, yet its net cash flow declined relative to last year. Which of the following could explain this performance?The companys depreciation expense declined.Depreciation: represents allocations of the costs of assets over their useful lives is referred to as a noncash charge applies to tangible assetsAll of the aboveOn its one year ago balance sheet, Sherman Books had retained earnings equal to $510 million. On its current year balance sheet, retained earnings were also equal to $510 million. Which of the following statements is most correct?If the companys net income in the current year was $200 million, dividends paid must have also equaled $200 million.Market value added (MVA) is:equal to the total market value of the firms stock minus the total common equity.The statement of cash flows:reports the impact of a firms operating, investing, and financing activities on cash flows over an accounting period.Net cash flow is generally defined as net income plus:depreciation and amortizationWhich of the following statements are correct?The quantitative and verbal materials in the annual report are equally important.Which of the following is a reason for the initial need for financial statements?As lending became more complex, physical inspection of assets was not always possible.Retained earnings:is the total amount of income over time that has been reinvested in the firm.Economic value added differs from accounting profit in that it:considers the cost of equity capital while accounting profit does not.Common stockholders equity (net worth):is the capital supplied by common stockholders; it is the residual book value of the firm after all claims other than the ownership claim of common stockholders are satisfied.The statement of retained earnings:reports how much of the firms earnings were retained in the business rather than paid out in dividends.True or False: Financial statements are primarily designed for use by managers.FalseTrue or False: Whereas economic value added focuses on the effects of managerial action since the inception of the company, market value added focuses on managerial effectiveness in a given year.FalseLand Land Land, Inc. has a total asset turnover ratio of 3.0. The average total asset turnover ratio for the firm's industry is 2.5. Based on this information you know that:LLL more efficiently utilizes its assets than the average firm in the industry.Basic earning power:shows the raw earnings power of the firms assets before the influence of taxes and leverage.Which of the following is most correct:A firm with financial leverage has a larger equity multiplier than an otherwise identical firm with no debt in its capital structure.Which of the following are key qualitative factors that should be considered when evaluating a company? to what extent is company performance tied to a key customer, a key product, or a single supplier what percentage of the companys business is generated overseas what is the company competition and legal and regulatory environments what are the companys future prospectsall of the above are important qualitative factorsProfitability ratios:show the combined effects of all areas of the firm on operating results.When using ratio analysis you are most likely to compare your companys ratios with:those of companies in similar industries.A modified Du Pont chart shows how return on equity is affected by: profit margin on sales total assets turnover leverageAll of the aboveFinancial statement analysis is useful to: help anticipate future conditions as a starting point for planning actions that will improve the firms future performanceboth a and b are trueTrue or False: Turnover ratios (such as inventory turnover, fixed assets turnover, and total assets turnover) focus primarily on how effectively the firm uses its assets to generate revenue.TrueIf sales, assets, and common equity remain constant, but the profit margin on sales goes up, which of the following should also be true?the return on total assets will go upWetsdale Financial Company and Commerce Financial Company have the same total assets, the same total assets turnover, and the same return on equity. However, Wetsdale has a higher return on assets than Commerce. Which of the following can explain these ratios?Wetsdale has a higher profit margin and a lower debt ratio than Commerce.P/E ratios are reflections of: the firms growth prospects the firms riskboth a and bLand Land Land, Inc. has a current ratio of 2.0. The average current ratio for the firm's industry is 1.5. Based on this information you know that:LLL is more liquid than the average firm in the industry.Debt management ratios:measure the amount of debt the firm uses.Land Land Land, Inc. has a total asset turnover ratio of 2.0. The average total asset turnover ratio for the firm's industry is 2.5. Based on this information you know that:LLL less efficiently utilizes its assets than the average firm in the industry.Land Land Land, Inc. has a debt ratio of 0.3. The average debt ratio for the firm's industry is 0.4. Based on this information you know that:LLL has relatively less debt than the average firm in the industry.Other things held constant, which of the following will not affect the quick ratio? (Assume that current assets equal current liabilities and inventory has a positive balance.)accounts receivable are collectedAll else being equal, which of the following will increase a companys current ratio?an increase in accounts receivableMarket value ratios:give an indication of what investors think of the firms performance and future prospects.Which of the following are limitations of the times interest earned ratio? it does not consider interest payments it does not consider fixed financial payments other than interest it uses earnings before interest and taxes which does not represent all of the cash flow available to service debtb and c are correctLand Land Land, Inc. has a return on common equity of 30%. The average return on common equity for the firm's industry is 25%. Based on this information you know that:LLL generates more income for shareholders than the average firm in the industry.Land Land Land, Inc. has a current ratio of 2.0. The average current ratio for the firm's industry is 2.5. Based on this information you know that:LLL is less liquid than the average firm in the industry.Land Land Land, Inc. has a debt ratio of 0.6. The average debt ratio for the firm's industry is 0.4. Based on this information you know that:LLL has relatively more debt than the average firm in the industry.Which of the following are limitations of ratio analysis? it is sometimes hard to classify firms into specific industries seasonal effects on accounting numbers differing accounting practicesAll of the aboveAsset management ratios:measure how effectively a firm is managing its assets.Which of the following is most correct?A large current ratio (relative to competitors) is "good" from the standpoint of liquidity, but could damage profitability.Days sales outstanding:measures how quickly a firm converts credit sales into cashLand Land Land, Inc. has a return on common equity of 20%. The average return on common equity for the firm's industry is 25%. Based on this information you know that:LLL generates less income for shareholders than the average firm in the industry.Liquidity ratios:show the relationship of a firms cash and other current assets to its current liabilities.