Chaprters 1 to 4 – which of the following goals of the firm are

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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