30275706-Mid-Term-Spring-04-05-Solution

30275706-Mid-Term-Spring-04-05-Solution - MULTIPLE CHOICE...

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MULTIPLE CHOICE QUESTIONS Agency Answer: d Diff: M 1 . Which of the following statements is most correct? a. One of the ways in which firms can mitigate or reduce agency problems between bondholders and stockholders is by increasing the amount of debt in the capital structure. b. The threat of takeover is one way in which the agency problem between stockholders and managers can be alleviated. c. Managerial compensation can be structured to reduce agency problems between stockholders and managers. d. Statements b and c are correct. e. All of the statements above are correct Firm organization Answer: a Diff: E N 2. Until this year, Cheers Inc. was organized as a partnership. This year, the partners have decided to organize the business as a corporation. As a result of this change in organizational form, which of the following statements is most correct? a. Cheers’ shareholders (the ex-partners) will now have limited liability. b. Cheers will now be subject to fewer regulations. c. Cheers will now pay less in taxes. d. Cheers’ investors will now find it more difficult to transfer ownership. e. Cheers will now find it more difficult to raise additional capital. Net cash flow, free cash flow, and cash Answer: c Diff: E N 3. Last year, Owen Technologies reported negative net cash flow and negative free cash flow. However, its cash on the balance sheet increased. Which of the following could explain these changes in its cash position? a. The company had a sharp increase in its depreciation and amortization expenses. b. The company had a sharp increase in its inventories. c. The company issued new common stock. d. Statements a and b are correct. e. Statements a and c are correct. Income statement Answer: b Diff: E N 4 . Cox Corporation recently reported an EBITDA of $22.5 million and $5.4 million of net income. The company has $6 million interest expense and the corporate tax rate is 35 percent. What was the company’s depreciation and amortization expense? a. $ 4,333,650 1
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b. $ 8,192,308 c. $ 9,427,973 d. $11,567,981 e. $14,307,692 Financial statement analysis Answer: e Diff: E 5. Company A and Company B have the same total assets, return on assets (ROA), and profit margin. However, Company A has a higher debt ratio and interest expense than Company B. Which of the following statements is most correct? a. Company A has a higher ROE (return on equity) than Company B. b. Company A has a higher total assets turnover than Company B. c. Company A has a higher operating income (EBIT) than Company B. d. Statements a and b are correct. e. Statements a and c are correct. Du Pont equation Answer: a Diff: E 6. The Wilson Corporation has the following relationships: Sales/Total assets 2.0 × Return on assets (ROA) 4.0% Return on equity (ROE) 6.0% What is Wilson’s profit margin and debt ratio? a.
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30275706-Mid-Term-Spring-04-05-Solution - MULTIPLE CHOICE...

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