Chapter 1
1) Which of the following goals of the firm are synonymous (equivalent) to the maximization of shareholder wealth?
A) profit maximization
B) maximization of the total market value of the firm’s common stock
C) risk minimization
D) none of the above
2) A corporate manager decides to build a new store on a lot owned by the corporation that could be sold to a local developer for $250,000. The lot was purchased for $50,000 twenty years ago. When determining the value of the new store project
A) the cost of the lot is zero since the corporation already owns it.
B) the incremental cash flow should be the $50,000 original cost less accumulated amortization.
C) the cost of the lot for valuation purposes is $50,000 because land does not depreciate.
D) the opportunity cost of the lot is $250,000 and should be included in calculating the value of the project.
3) Consider the after-tax cash flows for Project S and Project L:
Project S Project L
Year 1 $3000 0
Year 2 0 $3000
A rational person would prefer ________.
A) Project L because they can avoid taxes by receiving cash flows later
B) Project S because the money can be reinvested sooner
C) information about profits instead of cash flows
D) neither investment over the other as they both net the same amount of after-tax cash flows
4) Working capital management is concerned with
A) how a firm should raise money to fund its investments.
B) how a firm can best manage its cash flows as they arise in its day-to-day operations.
C) what long-term investments a firm should undertake.
D) managing a firms capital stock.
Chapter 2
5) General Electric (GE) has been a public company for many years with its common stock traded on the New York Stock Exchange. If GE decides to sell 500,000 shares of new common stock, the transaction will be describe as
A) an initial public offering.
B) a secondary market transaction because GE common stock has been trading for years.
C) a money market transaction because GE raises new money to fund its business.
D) a seasoned equity offering because GE has sold common stock before.
6) When a company repurchases its own common stock, it is likely that
A) the stock price will remain the same as this is simply an internal transaction.
B) the stock price will decrease because the company is creating artificial demand for its stock.
C) the stock price will increase because the company views the stock as undervalued.
D) the board of directors will be fired for incompetence.
7) Activities of the investment banker include
A) assuming the risk of selling a security issue.
B) selling new securities to the ultimate investors.
C) providing advice to firms issuing securities.
D) all of the above
8) A basis point is equal to
A) one percent.
B) one-tenth of one percent.
C) one-hundredth of one percent.
D) one-half of one percent.
9) The risk premium would be greater for an investment in an oil and gas exploration in unproven fields than an investment in preferred stock because
A) oil and gas exploration investments have a greater variability in possible returns.
B) the preferred stock is more liquid.
C) the inflation rate would vary more with oil and gas exploration investments.
D) both A and B
Chapter 3
10) Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue’s net profit margin is equal to
A) 45.67%.
B) 35.67%.
C) 36.67%.
D) 25.67%.
Please refer to Table 3-1 (Jones Company) for questions 11 & 12.
Table 3-1: Jones Company
Financial Information
December 2009
December 2010
Net Income
$2,000
$4,000
Accounts receivable
750
950
Accumulated depreciation
1,000
1,500
Common stock
4,500
5000
Paid-in capital
7,500
8500
Retained earnings
1,500
3,500
Accounts payable
750
750
11) Based on the information in Table 3-1, calculate the amount of dividends paid by Jones Company in 2010 (no assets were disposed of during the year, and there was no change in interest payable or taxes payable).
A) $2,500
B) $2,000
C) $3,500
D) $4,000
12) Based on the information in Table 3-1, assuming that no assets were disposed of during 2010, the amount of depreciation expense was
A) $500.
B) $375.
C) $2,500.
D) $3,500.
13) Given the following financial statements for ACME Corporation, what amount did the company pay in dividends for 2010?
Income Statement
Balance Sheet
Year Ended 12/31/10
12/31/2010
12/31/2009
Sales
$1,300,000
Current Assets
$50,000
$45,000
Cost of Goods Sold
750,000
Gross Fixed Assets
880,000
650,000
Operating Expenses
200,000
Less Accumulated Depreciation
450,000
350,000
Depreciation Expense
100,000
Fixed Assets
430,000
350,000
EBIT
250,000
Total Assets
$480,000
$395,000
Interest Expense
50,000
EBT
200,000
Current Liabilities
$35,000
$50,000
Taxes
80,000
Long-term Debt
330,000
270,000
Net Income
$120,000
Common Stock
5,000
5,000
Retained Earnings
110,000
70,000
Total Liabilities & Equity
$480,000
$395,000
A) $80,000
B) $110,000
C) $70,000
D) $40,000
Chapter 4
Please refer to Table 4-2 for the following questions on Chapter 4 (14-20).
Table 4-2
Drummond Company
Balance Sheet
Assets:
Cash and marketable securities
$400,000
Accounts receivable
1,415,000
Inventories
1,847,500
Prepaid expenses
24,000
Total current assets
3,686,500
Fixed assets
2,800,000
Less: accum. depr.
(1,087,500)
Net fixed assets
1,712,500
Total assets
$5,399,000
Liabilities:
Accounts payable
$600,000
Notes payable
875,000
Accrued taxes
92,000
Total current liabilities
$1,567,000
Long-term debt
900,000
Common Stock (100,000 shares)
700,000
Retained Earnings
2,232,000
Total liabilities and owner’s equity
$5,399,000
Net sales (all credit)
$6,375,000
Less: Cost of goods sold
(4,375,000)
Selling and administrative expense
(1,000,000)
Depreciation expense
(135,000)
Interest expense
(100,000)
Earnings before taxes
$765,000
Income taxes
(306,000)
Net income
$459,000
14) Based on the information in Table 4-2, the current ratio is
A) 2.97.
B) 2.46.
C) 2.35.
D) 2.23.
15) Based on the information in Table 4-2, the acid-test ratio is
A) 1.17.
B) 1.33.
C) 1.39.
D) 2.15.
16) Based on the information in Table 4-2, the average collection period is
A) 70 days.
B) 81 days.
C) 89 days.
D) 127 days.
17) Based on the information in Table 4-2, the debt ratio is
A) 28.12%.
B) 34.74%.
C) 45.69%.
D) 42.03%.
18) Based on the information in Table 4-2, the return on equity is
A) 19.33%.
B) 18.47%.
C) 16.66%.
D) 15.65%.
19) Based on the information in Table 4-2, and assuming the company’s stock price is $50 per share, the P/E ratio is
A) 10.89.
B) 14.33.
C) 24.44.
D) 27.50.
20) Based on the information in Table 4-2, the times interest earned ratio is
A) 11.48.
B) 5.25.
C) 4.88.
D) 8.65.
Please refer to Table 3-1 (Jones Company) for questions 11 & 12.
Table 3-1: Jones Company
Financial Information
December 2009
December 2010
Net Income
$2,000
$4,000
Accounts receivable
750
950
Accumulated depreciation
1,000
1,500
Common stock
4,500
5000
Paid-in capital
7,500
8500
Retained earnings
1,500
3,500
Accounts payable
750
750
11) Based on the information in Table 3-1, calculate the amount of dividends paid by Jones Company in 2010 (no assets were disposed of during the year, and there was no change in interest payable or taxes payable).
A) $2,500
B) $2,000
C) $3,500
D) $4,000
12) Based on the information in Table 3-1, assuming that no assets were disposed of during 2010, the amount of depreciation expense was
A) $500.
B) $375.
C) $2,500.
D) $3,500.
13) Given the following financial statements for ACME Corporation, what amount did the company pay in dividends for 2010?
Income Statement
Balance Sheet
Year Ended 12/31/10
12/31/2010
12/31/2009
Sales
$1,300,000
Current Assets
$50,000
$45,000
Cost of Goods Sold
750,000
Gross Fixed Assets
880,000
650,000
Operating Expenses
200,000
Less Accumulated Depreciation
450,000
350,000
Depreciation Expense
100,000
Fixed Assets
430,000
350,000
EBIT
250,000
Total Assets
$480,000
$395,000
Interest Expense
50,000
EBT
200,000
Current Liabilities
$35,000
$50,000
Taxes
80,000
Long-term Debt
330,000
270,000
Net Income
$120,000
Common Stock
5,000
5,000
Retained Earnings
110,000
70,000
Total Liabilities & Equity
$480,000
$395,000
A) $80,000
B) $110,000
C) $70,000
D) $40,000
Chapter 4
Please refer to Table 4-2 for the following questions on Chapter 4 (14-20).
Table 4-2
Drummond Company
Balance Sheet
Assets:
Cash and marketable securities
$400,000
Accounts receivable
1,415,000
Inventories
1,847,500
Prepaid expenses
24,000
Total current assets
3,686,500
Fixed assets
2,800,000
Less: accum. depr.
(1,087,500)
Net fixed assets
1,712,500
Total assets
$5,399,000
Liabilities:
Accounts payable
$600,000
Notes payable
875,000
Accrued taxes
92,000
Total current liabilities
$1,567,000
Long-term debt
900,000
Common Stock (100,000 shares)
700,000
Retained Earnings
2,232,000
Total liabilities and owner’s equity
$5,399,000
Net sales (all credit)
$6,375,000
Less: Cost of goods sold
(4,375,000)
Selling and administrative expense
(1,000,000)
Depreciation expense
(135,000)
Interest expense
(100,000)
Earnings before taxes
$765,000
Income taxes
(306,000)
Net income
$459,000
14) Based on the information in Table 4-2, the current ratio is
A) 2.97.
B) 2.46.
C) 2.35.
D) 2.23.
15) Based on the information in Table 4-2, the acid-test ratio is
A) 1.17.
B) 1.33.
C) 1.39.
D) 2.15.
16) Based on the information in Table 4-2, the average collection period is
A) 70 days.
B) 81 days.
C) 89 days.
D) 127 days.
17) Based on the information in Table 4-2, the debt ratio is
A) 28.12%.
B) 34.74%.
C) 45.69%.
D) 42.03%.
18) Based on the information in Table 4-2, the return on equity is
A) 19.33%.
B) 18.47%.
C) 16.66%.
D) 15.65%.
19) Based on the information in Table 4-2, and assuming the company’s stock price is $50 per share, the P/E ratio is
A) 10.89.
B) 14.33.
C) 24.44.
D) 27.50.
20) Based on the information in Table 4-2, the times interest earned ratio is
A) 11.48.
B) 5.25.
C) 4.88.
D) 8.65.
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