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A few practice questions from chapters 1-5

Go over the problems below, provide an answer, bring your questions to class. Correct answers in bold.
1. The mixture of debt and equity by the firm to finance its operations is called:
a !or"ing capital management.
b #inancial depreciation.
c $gency cost analysis
d) Capital structure.
%. The management of the firm&s short'term assets and liabilities is called:
a) Working capital management.
b #inancial depreciation.
c $gency cost analysis.
d Capital budgeting.
e Capital structure.
(. The possibility of conflict of interest between the stoc"holders and management of the firm is
a The shareholder&s conundrum.
b Corporate brea"down.
c The agency prolem.
d Corporate activism.
e )egal liability.
*. !hich of the following help ensure managers act in the best interest of owners+
,. $ compensation pac"age for managers that ties their salary to the firm&s share price.
,,. -anagers are promoted only if the firm prospers.
,,,. The threat that if the firm does poorly, shareholders will use a proxy to fight to replace the
existing management.
,.. There is a high degree of li"elihood the firm will become a ta"eover candidate if the firm does
a , and ,, only
b ,, and ,,, only
c ,, ,,,, and ,. only
d ,, ,,, ,,,, and ,.
e) !" !!" !!!" and !#
/. !hich of the following is a true statement concerning corporations+
a The equity that can be raised by the corporation is limited to the current shareholders& personal
) The life of the corporation is unlimited.
c The corporation has limited liability for business debts.
d !hen dividends are paid, corporate profits are taxed once.
e ,t is difficult to transfer ownership of corporate shares.
0. !hich of the following would be considered a primary mar"et transaction+
a A uy order to an in$estment anker for a new pulic stock offering.
b $ buy order to a bro"er for shares of a company on 1234.
c $ buy order to a bro"er for shares of a company on $-45.
d $ buy order to a dealer for shares of a company on 6TC.
e $ buy order for a stoc" listed on a regional exchange.
7. The financial statement showing a firm&s accounting value on a particular date is the:
a ,ncome statement.
) %alance sheet.
c 3tatement of cash flows.
d Tax reconciliation statement.
e 3hareholder&s equity sheet.
8. The financial statement summari9ing a firm&s performance over a period of time is the:
a) !ncome &tatement.
b :alance sheet.
c 3tatement of cash flows.
d Tax reconciliation statement.
e 3hareholder&s equity sheet.
;. <<<<<<<<<<< refers to the difference between a firm&s current assets and its current liabilities.
a 6perating cash flow.
b Capital spending.
c) 'et working capital.
d Cash flow from assets.
e Cash from to creditors.
1=. ,f current assets > ?;/, net fixed assets > ?%/=, long'term debt > ?*=, and the owner&s equity >
?%==, what is the value of current liabilities if it is the only other item on the balance sheet+
a '?/=
b ?/=
c ?1(5
d ?1*/
e ?/*/
@se the following to answer question 11:
Taxable income Tax rate
? = ' ? /=,=== 1/ A
? /=,==1 ' ? 7/,===B %/A
? 7/,==1 ' ? 1==,=== (*A
? 1==,==1 ' ? ((/,=== (;A
11. Celeste .ideo, ,nc. reports %=== taxable income of ?%==,===. Cow large is this firm&s tax bill+
a ?*8,7/=
) )*1"+5(
c ?07,===
d ?78,===
e ?;1,1%/
1%. The current ratio is measured as:
a Current assets minus current liabilities.
b Current assets di$ided y current liailities.
c Current liabilities minus inventory, divided by current liabilities.
d Cash on hand divided by current liabilities.
e Current liabilities divided by current assets.
1(. !hich of the following is a correct interpretation of a profit margin of =.%=+
a) ,or each )1 of sales the firm earns twenty cents of income.
b #or each ?1 of sales the firm earns twenty cents before operating expenses
c #or each ?1 of sales, ?% falls to the bottom line.
d ,t ta"es sales of ?1 to generate ?%= in net profit after taxes.
e ,t ta"es twenty cents in sales to generate ?1 in profit.
1*. $ firm with income of ?/==,=== pays *8A of net income out in dividends. ,f the firm has 1/=,===
shares of common stoc" outstanding, what is he dividend paid per share of stoc"+
a ?=.(=
b ?1.**
c ?1.*(
d ?1.7(
e ?(.((
1/. Computronics, ,nc. has a current ratio of 1./. This implies that if the firm liquidates its current
assets in order to pay off its current liabilities, it can sell the current assets for as little as:
a 1/A of boo" value.
b %/A of boo" value.
c ((A of boo" value.
d) *-. of ook $alue.
e 1/=A of boo" value.
10. $ firm has sales of ?/==, total assets of ?(==, and a debtDequity ratio of %. ,f its return on equity is
1/A, what is its net income+
a ?7./=
b ?15.((
c ?%%./=
d ?(%./=
e ?/=.==
17. ,nterest earned on both the initial principal and the interest reinvested from prior periods is called
a Growth.
b $nnual interest.
c 3imple interest.
d ,nterest on interest.
e Compound interest.
18 The process of finding the present value of some future amount is often called <<<<<<<<<.
a Growth
) /iscounting
c $ccumulation
d Compounding
e Eeduction
1;. 2ou received a ?1 savings account earning /A on your 1
birthday. Cow much will you have in
the account on your *=
birthday if you do not withdraw any money before then+
a ?/.8;
b ?0.(*
c ?*.-(
d ?7.==
e ?7.=*
%=. 2our grandfather placed ?%,=== in a trust fund for you. ,n 1= years the fund will be worth ?/,===.
!hat is the rate of return on the trust fund+
a /.;8A
b 8.70A
c) 0.*(.
d ;.;8A
e 1=.1*A
%1. 2ou need ?%,=== to buy a new stereo for your car. ,f you have ?8== to invest at /A compounded
annually, how long will you have to buy the stereo+
a 0./8 years.
b 8.*% years.
c 1*./8 years.
d 1/.7/ years.
e) 11.-1 years.
%%. Granny puts ?(/,=== into a ban" account earning *A. 2ou can&t withdraw the money until the
balance has doubled. Cow long will you have to leave the money in the account+
a 10 years
b 17 years
c) 11 years
d 1; years
e %= years
%(. $ndy promises 6pie that he will give him ?/,=== upon graduation from college at -ayberry @.
Cow much must $ndy invest today to ma"e good on his promise, if 6pie is expected to
graduate in 1% years and $ndy can earn /A on his money+
a ?%,1(/.(%
b ?+"-12.10
c ?%,881.11
d ?(,=1%.88
e ?8,;7;.%8