Unit Exam 1 - BAM 313 - Financial Management

Unit Exam 1 - BAM 313 - Financial Management - Introduction...

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Unformatted text preview: Introduction to Financial Management 47 Unit 1 Examination Multiple Choice Questions (Enter your answers on the enclosed answer sheet) 1) 995:!» new» new!» i3 ups-9: CLS'JU'D) a. b. c. d. Maximization of shareholder wealth as a goal is superior to profit maximization be— cause it considers the time value of the money. following the goal of shareholder wealth maximization will ensure high stock prices. it considers uncertainty. A and C In terms of the costs to organize each, which of the following sequences is correct, moving from highest to lowest cost? sole proprietorship, general partnership, limited partnership, corporation corporation, limited partnership, general partnership, sole proprietorship sole proprietorship, general partnership, corporation, limited partnership general partnership, sole proprietorship, limited partnership, corporation Which of the following are characteristics of a limited partnership? General partners have unlimited liability. There must be one or more general partners. Limited partners may not participate in the management of the limited partnership. all of the above Advantages of the corporate form of business organization inciude minimal legal requirements. easier transfer of ownership. doubie taxation. none of the above. Which of the following forms of business organization has the greatest ability to at- tract new capital? Corporation General partnership Sole proprietorship Limited partnership Which of the following is an advantage of the general partnership form of business organization? Double taxation Easy ability to raise capital Limited liability of business owners Low cost of formation introduction to Financial Management v nit 1 Examination 7} Corporation A received $10,000 in dividends from Corporation B. How much of the $10,000 must Corporation A include in its taxable income? $3,000 if Corporation A owns 100% of Corporation B $0, because dividends from another corporation are not taxed $2,000 if Corporation A owns between 80% and 100% of Corporation B $7,000 if Corporation A owns less than 80% of Corporation B 51965» 8) The principie of risk-return trade off means that a. higher risk investments must earn higher returns. b. an investor who bought stock in a small corporation five years ago has more money than an investor who bought U.S. Treasury bonds five years ago. c. a rational investor wili only take on higher risk if he expects a higher return. d. an investor who takes more risk will earn a higher return. 9) Profits are down so the controller decides to change the corporation's accounting policy relating to inventory costing. The change will allow the corporation to report higher income and higher assets, although the physical inventory has not changed. Which of the following statements is most correct? The stock price is likely to increase because income is higher. if the stock price increases, the stock market is efficient. The stock price is likely to decrease because reported inventory is higher. The stock price is likely to be unaffected because the stock market is efficient. up 0-5» 10) 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 described as a. a money market transaction because GE raises new money to fund its business. b. a secondary market transaction because GE common stock has been trading for years. c. an initial public offering. d. a seasoned equity offering because GE has sold common stock before. 11) The majority of public offerings of securities must be registered with the Securities and Exchange Commission, a costly and time consuming process. Which of the fol~ lowing methods allows corporations with the ability to “speed up" the registration process? a. Offer an underwriting. b. File a shelf registration. c. File a secondary offering. d. Offer a privileged subscription. 48 introduction to Financial Management Unit 1 Examination 12) The costs associated with issuing securities to the public can be high. Some types of securities have lower expenses associated with them than others. Which of the follow- ing is the least costly security to issue? a. Corporate bonds b. Common stock 0. Preferred stock d. All of the above are about equal in cost to issue. 13) The risk premium would be greater for an investment in an oif and gas exploration in unproven fields than an investment in preferred stock because 21. 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. (1. both A and B 14) Which of the following represents the correct ordering of standard deviation of returns over the period 1926 to 2005 (from highest to lowest standard deviation of returns)? a. Treasury bills, Common stocks, Long—term corporate bonds, Smail firm common stocks 1:). Small firm common stocks, Common stocks, Long—term corporate bonds, Treasury bills 0. Treasury bills, Long—term corporate bonds, Common stocks, Small firm common stocks d. Treasury bills, Common stocks, Long—term corporate bonds, Small firm common stocks 15) What is the term for a graphical representation of the relationship between interest rates and the maturities of debt securities? a. Maturity chart b. Term curve c. Inflationary expectations d. Yietd curve Tabie 3-1 Jones Company Financial Information December 2007 December 2008 Net income $2,000 $5,000 Accounts receivable 750 750 Accumulated depreciation 1,000 1,500 Common stock 4,500 5,000 Paid-in capital 7,500 8,000 Retained earnings 1,500 2,500 Accounts payable 750 750 49 Introduction to Financial Management Unit 1 Examination 16) Based on the information in Table 3-1, assuming that no assets were disposed of dur- ing 2008, the amount of depreciation expense was a. $375. b. $3,500. C. $2,500. d. $500. 17) What financial statement explains the changes that took place in the firm's cash bal- ance over a period? a. reconciliation of free cash flow b. balance sheet c. income statement d. statement of cash flow Table 3-1 Jones Company Financial Information December 2007 December 2008 Net income $2,000 $5,000 Accounts receivable 750 750 Accumulated depreciation 1,000 1,500 Common stock 4,500 5,000 Paid—in capital 7.500 8,000 Retained earnings 1,500 2,500 Accounts payable 750 750 18) Based on the information in Table 3-1, calculate the after tax cash flow from opera- tions for 2008 (no assets were disposed of during the year, and there was no change in interest payable or taxes payable). a. $3,375 b. $3,750 C. $6,500 6. $5,500 50 Introduction to Financial Management v nit 1 Examination 19) Given the following financial statements for ACME Corporation, what is the company’s free cash flow for 2007? Year Ended 12/31/07 12/31/07 12/31/06 Sales $1,200,000 Current Assets $50,000 $45,000 Cost of Goods Sol 750,000 Gross Fixed Assets 880,000 650,000 Operating Expenses 200,000 Less Acc. Dep. 450,000 350,000 Depreciation Expense 100,000 Fixed Assets 430,000 350,000 EBIT 150,000 Total Assets $480,000 $395,000 Interest Expense 50,000 EBT 100,000 Current Liabilities $35,000 $50,000 Taxes 40,000 Long—term Debt 330,000 270,000 Net Income $ 60,000 Common Stock 5,000 5,000 Retained Earnings 110,000 70,000 Total Liab & Equit $480,000 $395,000 a. $190,000 b. - $40,000 0. - $15,000 d. $0 Table 3-2 Enigma has the following financial information: Net Income $ 70,000 Taxable Income (EBT): $100,000 Interest Expense: $ 20,000 Depreciation Expense: $ 15,000 Tax Expense: $ 30,000 Increase in Current Assets: $ 20,000 Increase in NP and Accruals $ 10,000 Decrease in Gross Fixed Assets: $100,000 No changes were made in interest payable or taxes payable. 20) Based on the information in Table 3-2, what is Enigma’s free cash flow? +$35,000 +$195,000 -$5,000 +$75,000 51 Introduction to Financial Management Unit 1 Examination Table 4—1 Garland Company Baiance Sheet Assets: Cash and marketable securities $500,000 Accounts receivable 800,000 Inventories 1,350,000 Prepaid expenses 50,000 Total current assets $2,700,000 Fixed assets 5,000,000 Less: accum. depr. (2,000,000) Net fixed assets $3,000,000 Total assets $5,700,000 Liabilities: Accounts payabie $400,000 Notes payabie 900,000 Accrued taxes 75,000 Total current liabilities $1,375,000 Long—term debt 1,200,000 Owner’s equity 3,125,000 Total liabilities and owner’s equity $5,700,000 Net sales (all credit) $8,000,000 Less: Cost of goods sold (3,500,000) Selling and administrative expense (2,000,000) Depreciation expense (250,000) interest expense (150,000) Earnings before taxes 2,100,000 Income taxes (700,000) Net income $1,400,000 Common stock dividends $500,000 Common Shares Outstanding 1,000,000 21) Based on the information in Table 4—1, the current ratio is 52 Introduction to Financial Management Unit 1 Examination 53 Table 4-2 22) Based on the information in Table 4—2, the return on equity is 23) Based on the information in Table 42, and assuming the company’s stock price is a. Johnson Company Balance Sheet Assets: Cash and marketable securities Accounts receivable Inventories Prepaid expenses Total current assets Fixed assets Less: accum, depr. Net fixed assets Total assets Liabilities: Accounts payable Notes payable Accrued taxes Total current liabilities Long—term debt Common Stock (100,000 shares) Retained Earnings Total liabilities and owner’s equity Net sales (ali credit) Less: Cost of goods sold Selling and administrative expense Depreciation expense Interest expense Earnings before taxes income taxes Net income Common stock dividends Change in retained earnings $40 per share, the PIE ratio is 2437.5. $300,000 1,215,000 1,747,500 24,000 3,286,500 2,700,000 (1,087,500) 1,612,500 $4,899,000 $240,000 825,000 42,000 $1,107,000 975,000 100,000 2,717,000 $4,899,000 $6,375,000 (4,312,500) (1,387,500) (135,000) (127,000) $412,500 (225,000) $ 187,500 $97,500 $90.000 introduction to Financial Management vnit 1 Examination b. 21.33. C. 2.13. d. 44.44. 24) The two principal sources of financing for corporations are: a. debt and accounts payable b. cash and common equity c. common equity and preferred equity d. debt and equity 25) Which of the foilowing ratios would be the best way to determine how customers are paying for their purchases? a. Totai asset turnover b. Inventory turnover c. Average collection period d. Current ratio 54 ...
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This note was uploaded on 01/10/2012 for the course BUSINESS M BAM 313 taught by Professor Unitexam1 during the Spring '11 term at California Coast University.

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Unit Exam 1 - BAM 313 - Financial Management - Introduction...

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