Business Finance Test 1 Chps. 1,3,&4

Which of the following best describes the goal of the firm? A) Maximizing the firm’s profits. B) Maximizing the value of the firm’s equity. C) Maximizing the value of the firm’s debt. D)Minimizing the firm’s risk. E) Maximizing the current dividend paid to shareholders. B) Maximizing the value of the firm’s equity.
Dividends received by the firm: C) are usually 70% excluded from taxation
Net capital losses may be _______. C) carried back 3 years or carried forward up to 5 years
Dividends paid by the firm ________. C) are paid out of net income
Net operating losses may be _______. D) carried back 2 years or carried forward up to 20 years
The true owners of a corporation are the _______. B) stockholders
The least liquid current asset is _______. A) cash B) accounts receivable C) common equity D) inventory E) plant and equipment D) inventory
The legal form of business that allows a firm to function separate and apart from its owners is the _________. C) corporation
What business type is a business owned by individual, therefore subject to a limited life and unlimited liability? A) Sole proprietorship
Of the legal forms of organizations discussed in chapter 1, which form of organization has the advantage of limited liability for all owners? C) corporation.
Which of the following would indicate an improvement in a company’s financial position, holding other things constant? A) The current and quick ratios both increase. B) The inventory and total assets turnover ratios both decline. C) The debt ratio increases. D) The profit margin declines. A) The current and quick ratios both increase.
If a bank loan officer were considering a company’s request for a loan, which of the following statements would you consider to be CORRECT? A) Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm. B) The lower the company’s times interest earned rage ratio, other things held constant, the lower the interest rate the bank would charge the firm. C) Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm. D) Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm. D) Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.
Which of the following items is NOT included in stockholders’ equity? A) Common stock B) Preferred stock C) Retained earnings D) Bonds D) Bonds
Maximization of shareholder wealth as a goal is superior to profit maximization because ________. A) it considers the time value of money B) following the shareholder wealth maximization goal will ensure high stock prices C) it considers uncertainty D) both a. and c. are correct E) a., b., and c. are all correct D) both a. and c. are correct
Profit maximization does not adequately describe the goal of the firm because:a) profit maximization does not consider the riskiness of returns.b) profit maximization does not consider bond interest payments.c) profit maximization ignores the timing of returns.d) both a and c.e) all of the above. d) both a and c.
The yield curve is typically _______. upward sloping
The sale of additional stock by a company whose shares are already publicly traded is called: a seasoned equity offering
The New York Stock Exchange is an example of _________. a secondary market.
If you sell 100 shares of General Electric common stock, this transaction takes place in: the secondary capital market.
If Electro Corporation sells a $20 million stock issue to an investment banking firm such as Merrill Lynch, this transaction takes place in: the primary capital market.
Capital market instruments include _________. loans, stocks and bonds
If an issuing firm sells securities to the investing public without involving an investment banker, the issue is called: a direct sale
Since there is a virtual certainty that the U.S. government will pay interest on Treasury securities and will redeem them at face value when they mature, Treasury securities are free of any _________ risk. default
What distinguishes the money market from the capital market? The money market deals with short-term instruments, whereas the capital market deals with long-term instruments.
Money market instruments include _________. treasury bills, negotiable CD’s and commercial paper
Which of the term structure theories would support the argument that the yield curve is determined by investors’ expectations of future interest rates? The unbiased expectations theory.
What is underwriting? Underwriting is the process of purchasing and selling of a new security issue by an investment banker.
If a new security issue is marketed to a definite and select group of investors (such as current stockholders, employees or customers) the issue is called: a privileged subscription
Which of the following are tax deductible expenses for a corporation?the repayment of debt outstanding preferred stock dividends land purchasescommon stock dividends interest paid on debt interest paid on debt
Cash available from operations after the firm pays for investments (in operating working capital and fixed assets) is called: free cash flow
Which of the following would indicate an improvement in a company’s financial position, holding other things constant? The current and quick ratios both increase
If a bank loan officer were considering a company’s request for a loan, which of the following statements would you consider to be CORRECT? Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.
Which of the following items is NOT included in stockholders’ equity?common stockpref stockretained earningsbonds bonds
Which of the term structure theories claims that investors require maturity premiums to compensate them for buying securities that expose them to the risks of fluctuating interest rates? the liquidity preference theory.
One term structure theory is based on the idea that some investors (such as savings banks) prefer shorter maturities, while others (such as pension funds) prefer longer maturities. This theory is: the market segmentation theory.
what categories go under firm liquidity? current ratio, acid test ratio, days in receivables, A/R turnover, days in inventory, inventory turnover
what categories go under operating profitability? operating return on assets, operating profit margin, total asset turnover, fixed asset turnover
what categories go under financing decisions? debt ratio, times interest earned, ROE
angel investor wealthy private investor who provides a capital for business start-ups
common-sized income statement a balance sheet in which a firm’s expenses and profits are expressed as a percentage of its sales
gross profit margin gross profit dividend by net sales. It is a ratio denoting the gross profit earned by the firm as a percentage of its net sales
operating profit margin a firms operating profits divided by sales. The ratio serves as an overall measure of operating effectiveness
net profit margin net income divided by sales. ratio that measures the net income of the firm as a percent of sales
current assets consists primarily of cash, marketable securities, accounts receivable inventories and other current assets
treasury stock stock that has been issued and then repurchased by the firm
debt ratio total liabilities by its total assets. the ratio measures the extent to which a firm has been financed with debt
operations management how effectively management is performing in the day-to-day operations in terms of how well management is generating revenues and controlling costs and expenses

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