finance exam 1

the goal of the firm should be maximization of shareholder wealth
shareholder wealth maximization means maximizing the price of existing common stock
managers might attempt to benefit themselves in terms of salary and perquisites at the expense of shareholders, results from the separation of management and the ownership of the firm, may interfere with the implementation of maximizing shareholder wealth agency problem
show each balance sheet account as a percentage of total assets common-sized balance sheets
what doesn’t measure liquidity operating return on assets
when comparing inventory turnover ratios, other things being equal a higher inventory turnover is preferred to improve liquidity
how would the current ratio of a firm be decreased? inventories are sold on a long-term credit basis
an inventory turnover ratio of 7.2 compared to an industry average of 5.1 is likely to indicate that the firms products are in inventory for fewer days before they are sold than is average for the industry
what will lower a company’s financial leverage common stock is sold and the proceeds are used to pay off existing short-term debt
if a firm has no operating leverage and no financial leverage, then a 10% increase in sales will have what effect on EPS? EPS will increase by 10%
the incurrence of fixed operating costs in the firms income stream operating leverage
the usage of fixed cost financial securities to finance a portion of a firms assets financial leverage
the percentage change in a firms EBIT that results in a 1% change in sales or output is known as the degree of operating leverage
in the analysis of financial leverage, what is not referred to as fixed charges common stock divdends
a firm is considering the purchase of assets that will increase its fixed operating costs. the firm should decrease the proportion of ____ it employs in its capital structure if it wants to maintain its existing degree of combined leverage debt
_____ equals the number of shares outstanding times the market price per share total shareholder wealth
the overall objective of the firm for a for-profit entity maximize shareholders wealth
the inventory turnover ratio is a measure of liquidity
the dupont analysis can be used to help understand what drives return on assets
you calculate a z-score of 1.5 for a privately-held firm. this means the company is in the “gray area”
what are issues to be aware of when performing ratio analysis 1. different accounting policies between companies2. exchange rate fluctuations for companies with foreign operations 3. history does not necessarily foretell the future
the higher the fixed operating costs the higher the break-even point
what causes leverage to occur? fixed costs
a degree of combined leverage of 5.0 means for every 1% change in sales, EPS will change 5%
what conclusion would be true if you earn a higher rate of return on your investments the lower the present value would be for any lump sum you would receive in the future
consistent with the goal of shareholder wealth maximization, recognizes the time value of money and uses all of a project’s cash flows net present value method
for the net present value criteria, a project is acceptable if NPV is ____, while for the profitability index a project is acceptable if PI is ___ greater than or equal to zero; greater than or equal to one
the difference between the annual free cash flows if the project is undertaken and the annual free cash flows if the project is not undertaken; the difference between the cash flows the company will produce both with and without the investment it’s thinking about making incremental cash flow
the highest valued alternative that you had to give up when you made the choice opportunity cost
one where the prices of the assets traded in that market fully reflect all available information at any instant in time efficient market
indicates the amount of profits generated by a firm over a given time period income statement
the cost of producing or acquiring the product or service to be sold cost of goods sold
operating expenses consist of: marketing and selling expenses, general and administrative expenses, depreciation expense
sales or revenue minus the cost of goods sold gross profit
sales less the cost of goods sold less operating expenses operating income
operating income minus interest expense earnings before taxes
the earnings available to the firms common and preferred stockholders net income
breakeven analysis is the relationship between sales, variable costs, fixed costs and EBIT
standardizes financial information and identifies the strength and weakness ratio analysis
what does ratio analysis asses liquidity, profitability, asset management and capital structure
operating leverage with higher fixed costs results in higher breakever points, higher degree of leverage, higher risk and higher profitability at increased volumes
understand sales changes on profitability, provides risk profile of company, the more there are the greater the fluctuation in profits combined leverage

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