Finance Homework Review – Test 1

T/F – An asset’s liquidity is determined by how readily the asset can be converted to an appropriate amount of cash True
T/F – Based on generally accepted accounting principles, assets are recorded on the balance at their current market value. False
T/F – Fixed assets can be either tangible or intangible True
Which of the following are investment decisions, and which are financing decisions?a. Should we stock up with inventory ahead of the holiday season?b. Do we need a bank loan to help buy the inventory?c. Should we develop a new software package to manage our inventory?d. With a new automated inventory management system, it may be possible to sell off our Birdlip warehouse.e. With the savings we make from our new inventory system, it may be possible to increase our dividend.f. Alternatively, we can use the savings to repay some of our long-term debt. a. investingb. financingc. investingd. investinge. financingf. financing
We can imagine the financial manager doing several things on behalf of the firm’s stockholders. For example, the manager might do the following: a. Make shareholders as wealthy as possible by investing in real assets.b. Modify the firm’s investment plan to help shareholders achieve a particular time pattern of consumption.c. Choose high- or low-risk assets to match shareholders’ risk preferences.d. Help balance shareholders’ checkbooks. However, in well-functioning capital markets, shareholders will vote for only one of these goals. Which one will they choose? a. Make shareholders as wealthy as possible by investing in real assets.
T/F – The liability of sole proprietors is limited to the amount of their investment in the company. False
T/F – The separation of ownership and management is one distinctive feature of corporations.True False True
T/F – Capital budgeting decisions are used to determine how to raise the cash necessary for investments. False
T/F – A successful investment is one that increases the value of the firm. True
T/F – Facebook’s decision to spend $700 million to acquire Instagram is an investment decision. True
If a project’s value is less than its required investment, then the project is financially attractive. False
When a corporation fails, the maximum that can be lost by an individual shareholder is:the amount of their initial investment. the amount of their share of the profits. their proportionate share required to pay the corporation’s debts. the amount of their personal wealth. the amount of their initial investment.
A chief financial officer would typically: -report to the treasurer, but supervise the controller. -report to the controller, but supervise the treasurer. -report to both the treasurer and controller.-supervise both the treasurer and controller. supervise both the treasurer and controller.
T/F – Only small companies can go through financial markets to obtain financing. False
T/F – A financial intermediary invests in financial assets rather than real assets. True
T/F – For corporate bonds, the higher the credit quality of an issuer, the higher the interest rate. False
T/F -The opportunity cost of capital is the expected rate of return that shareholders can obtain in the financial markets on investments with the same risk as the firm’s capital investments. True
Financing for public corporations flows through: -the financial markets only. -financial intermediaries only. -derivatives markets. -the financial markets, financial intermediaries, or both. -the financial markets, financial intermediaries, or both.
When corporations need to raise funds through stock issues, they rely on the: -primary market. -secondary market. -tertiary market. -centralized NASDAQ exchange. primary market.
A share of IBM stock is purchased by an individual investor for $75 and later sold to another investor for $125. Who profits from this sale? -IBM-The first investor -The second investor -IBM and both investors -The first investor
When Patricia sells her General Motors common stock at the same time that Brian purchases the same amount of GM stock, GM receives: -the dollar value of the transaction. -the dollar amount of the transaction, less brokerage fees. -only the par value of the common stock. -nothing. nothing
Which one of these is a money market security? -Commercial paper -Common stock -2-year bond -20-year bond Commercial paper
Long-term financing decisions commonly occur in the: -option markets. -secondary markets.-capital markets. -money markets. capital markets
Construct a balance sheet for Sophie’s Sofas given the following data. (Be sure to list the assets and liabilities in order of their liquidity.) Cash balances = $ 9,000 Inventory of sofas = $ 190,000 Store and property = $ 90,000 Accounts receivable = $ 21,000 Accounts payable = $ 16,000 Long-term debt = $ 160,000 Cash – 9000AR – 21000Inventory – 190000Store and prop – 90000Total assets – 310000 Liabilities and Sh Eq:AP – 16000LT debt – 160000Sh eq – 134000Total Lia and Sh eq – 310000
A firm’s income statement included the following data. The firm’s average tax rate was 20%. Cost of goods sold $ 9,600 Income taxes paid 3,600 Administrative expenses 4,600 Interest expense 2,600 Depreciation 2,600 a. What was the firm’s net income?b. What must have been the firm’s revenues?c. What was EBIT? a) 14400b) 37400c) 20600
The year-end 2013 balance sheet of Brandex Inc. listed common stock and other paid-in capital at $2,800,000 and retained earnings at $5,100,000. The next year, retained earnings were listed at $5,400,000. The firm’s net income in 2014 was $1,070,000. There were no stock repurchases during the year. What were the dividends paid by the firm in 2014? 770,000
During the last year of operations, Theta’s accounts receivable increased by $24,000, accounts payable increased by $12,000, and inventories decreased by $2,600. What is the total impact of these changes on the difference between profits and cash flow? (Input your answer as a positive value.) 9,400
T/F – An increase in the accounts receivable balance increases the cash flow of a firm. False
T/F – The purchase of new equipment is a use of cash, and it reduces the firm’s net cash balance. True

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