Finance 1a

Question 1
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In 2002 Clanton, Inc. had a gross profit of $27,000 on sales of $110,000. Clanton’s operating expenses for 2002 were $13,000, and its net profit margin was .0585. Clanton had no interest expense in 2002. What was Clanton’s gross profit margin for 2002?

0.127

0.325

0.245

0.364

Question 2
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How can management use financial ratios?

To show how to obtain a guaranteed return.

To pinpoint shareholder fraud.

To identify some of the financial strengths and weaknesses of a company.

None of the above.

Question 3
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PDQ Corp. has sales of $3,000,000; the firm’s cost of goods sold is $1,425,000; and its total operating expenses are $700,000. The firm’s interest expense is $230,000, and the corporate tax rate is 40%. The firm paid dividends to preferred stockholders of $30,000, and the firm distributed $60,000 in dividend payments to common stockholders. What is PDQ’s “Addition to Retained Earnings?”

$297,000

$327,000

$387,000

$477,000

Question 4
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Common stock is the most relied on financing method used by corporations.

True

False

Question 5
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An advantage of the OIROI ratio is that it:

ignores the firm’s financing policies.

uses net income to measure efficiency.

combines total asset turnover and gross profit margin.

simply assumes that a firm is financed 50% by equity and 50% by debt.

Question 6
2 points
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Patti Corporation has current assets of $11,400, inventories of $4,000, and a current ratio of 2.6. What is Patti’s acid test ratio?

1.69

0.54

0.74

1.35

Question 7
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The Securities and Exchange Commission is responsible for setting margin requirements.

True

False

Question 8
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Which of the below does NOT belong on the asset side of a balance sheet?

Accounts receivable.

Depreciation expense.

Cash.

Inventory.

Question 9
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Which of the following is not a deductible business expense for income tax purposes?

Cost of goods sold.

Dividends.

Depreciation.

Interest.

Question 10
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Margin requirements are set by:

the Chairman of the Federal Reserve.

the Board of Governors of the Federal Reserve.

the Secretary of the Treasury

the Securities and Exchange Commission

Question 11
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Maximization of shareholder wealth as a goal is superior to profit maximization because:

it considers the time value of the money

it considers the time value of money and factors in uncertainty

it ensures high stock prices

it considers social benefits

Question 12
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The corporation is a legal entity separate from it owners; thus it is possible for the corporation to continue even upon the death of one or more shareholders.

True

False

Question 13
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The firm obtains cash from which of the following:

from operations

from the sale of assets

through borrowing

all of the above

Question 14
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If a company’s average collection period is lower than the industry average, then the company may be:

offering credit terms to its customers that are too stringent

allowing its customers too much time to pay their bills

too tough in collecting its accounts

both a and c above

Question 15
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“The markets are quick and the prices are right” describes a market that is:

effervescent

effective

efficient

effluent

Question 16
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The telecommunications system that provides a national information linkup among brokers and dealers operating in the over-the-counter market is called:

NCIS

NSQA

NASDAQ

NASQ

Question 17
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The investment banker does not underwrite the securities to be issued in which of the following?

competitive bid purchase

negotiated purchase

commission or best efforts basis

direct sale

Question 18
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If a firm has unused debt capacity and the general level of equity prices is depressed, financial executives will favor the issuance of debt securities over the issuance of new common stock.

True

False

Question 19
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If an investor is said to be “risk averse” then that investor:

cannot be induced to take on any risk.

will only take on additional risk if he/she expects to be compensated in the form of additional return.

will only take on the least risk possible.

is not behaving in a typical manner.

Question 20
2 points
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PDQ Corp. has sales of $3,000,000; the firm’s cost of goods sold is $1,425,000; and its total operating expenses are $700,000. The firm’s interest expense is $230,000, and the corporate tax rate is 40%. What is PDQ’s tax liability?

$258,000

$350,000

$387,000

$645,000

Question 21
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Most sole proprietorships convert to a corporation within a few years due to increasing state and federal regulations.

True

False

Question 22
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A corporation’s capital losses can be carried back three years and, if any loss still remains, it may be carried forward:

1 year

3 years

5 years

7 years

Question 23
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Which of the following statements best represents the “Agency Problem?”

Managers might attempt to benefit themselves in terms of salary and perquisites at the expense of shareholders.

The agency problem results from the separation of management and the ownership of the firm.

The agency problem may interfere with the implementation of maximizing shareholder wealth.

Managers might make decisions that are not in the best interest of shareholders.

All of the above.

Question 24
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According to the text, which of the following is not likely to have induced U.S. firms to expand globally?

The collapse of communism

The information technology revolution

Increased regulation in the U.S.

Increased price competition in the U.S.

Question 25
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DuPont analysis indicates that the return on equity may be boosted above the return on assets by using leverage (debt).

True

False

Question 26
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In a typical year, when new funds are being raised, corporate debt markets outweigh corporate equity markets in terms of dollar volume.

True

False

Question 27
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In making financial decisions, the relevant tax rate is the:

marginal tax rate.

average (effective) tax rate.

previous year’s tax rate.

maximum allowable tax rate.

Question 28
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A corporation may normally exclude what percentage of dividend income received from another corporation?

70%

50%

35%

30%

Question 29
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Which of the below belongs in the liability section of a balance sheet?

Interest expense.

Accumulated depreciation.

Accounts payable.

Preferred stock.

Question 30
2 points
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All risk is not equal because:

Some can be diversified away and some cannot

Some risk is free while some is not

Some risk is too small to be considered

None of the above

Question 31
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Revenues are taxed:

for economic stabilization

to achieve socially desirable goals

to provide revenues for government expenditures

all of the above

Question 32
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Which of the following is a real asset?

preferred stock

inventory

bonds

commissions

Question 33
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The term structure of interest rates usually indicates that longer terms to maturity have higher expected returns.

True

False

Question 34
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Corporations receive the majority of their financing through common stock sales.

True

False

Question 35
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Because they occur in private, less strict regulations are placed on the private placement of securities.

True

False

Question 36
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To assist firms in issuing securities, the investment banker will lower their portion of the flotation costs when marketing riskier securities.

True

False

Question 37
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Corporations are allowed to deduct specific expenses for income tax purposes. Several of these expenditures are deductible but they are not cash expenses. Which of the following is not a cash expenditure but is still deductible for income tax purposes?

Marketing expenses.

Payroll tax payments.

Wages and salaries.

Depreciation expense.

Question 38
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You are considering an investment in a U.S. corporate bond but you are not sure what rate of interest it should pay. Assume that the real risk-free rate of interest is 1.0%; inflation is expected to be 2.0%; the maturity risk premium is 1.5%; and, the default risk premium for AAA rated corporate bonds is 3%. What rate of interest should the U.S. corporate bond pay?

7.5%

4.5%

3.5%

3.0%

Question 39
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The U.S. tax system favors ________ as a means of raising capital.

common stock

preferred stock

debt

none of the above

Question 40
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PDQ Corp. has sales of $3,000,000; the firm’s cost of goods sold is $1,425,000; and its total operating expenses are $700,000. What is PDQ’s EBIT?

$ 825,000

$ 875,000

$1,575,000

$2,300,000

Question 41
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If you were given current assets and current liabilities, what ratio could you compute?

accounts receivable turnover ratio

net profit margin

current ratio

current debt margin

Question 42
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Financial intermediaries:

offer indirect securities

include the national and regional stock exchange

usually are underwriting syndicates

constitute the various secondary markets

Question 43
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Which of the following represents an attempt to measure the net results of the firm’s operations (revenues versus expenses) over a given time period?

Balance Sheet

Statement of Cash Flows

Income Statement

Sources and Uses of Funds Statement

Question 44
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In the aggregate, households usually spend more on current consumption than they earn.

True

False

Question 45
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Which of the following financial ratios is the best measure of the operating effectiveness of a firm’s management?

current ratio

net profit margin

quick ratio

OIROI

Question 46
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Real assets are tangible, whereas financial assets merely reflect claims for future payment on other economic units.

True

False

Question 47
2 points
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An example of a primary market transaction is:

a new issue of common stock by AT&T

a sale of some outstanding common stock of AT&T by an investor

AT&T repurchasing its own stock from a stockholder

All of the above

Question 48
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The investment banker does not underwrite the securities to be issued in which of the following?

initial public offering

primary market transaction

firm commitment

best efforts

Question 49
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According to the SEC the correct sequence of events for a security issue is:

red herring, final prospectus, registration statement

registration statement, red herring, final prospectus

final prospectus, registration statement, red herring

red herring, registration statement, final prospectus

Question 50
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There is no legal distinction made between the assets of the business and the personal assets of any of the owners in the limited partnership.

True

False