Finance 101 - Exam 2

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SusanneS28
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205309
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Finance 101 - Exam 2
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2013-03-06 01:11:03
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Finance 101 Exam
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Chapters 1-3
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  1. Capital structure
    • How should we pay for our assets?
    • Should we use debt or equity?
    • Mixture of debt and equity for a firm.
  2. The division of profits and losses among the members of a partnership is formalized in the:
    A. group charter.
    B. statement of purpose.
    C. partnership agreement.
    D. indenture contract.
    E. indemnity clause.
    C. partnership agreement
    (this multiple choice question has been scrambled)
  3. Agency costs refer to:
    A. corporate income subject to double taxation.
    B. the costs that result from default and bankruptcy of a firm.
    C. the costs of any conflicts of interest between stockholders and management.
    D. the total interest paid to creditors over the lifetime of the firm.
    E. the total dividends paid to stockholders over the lifetime of a firm.
    C. the costs of any conflicts of interest between stockholders and management.
    (this multiple choice question has been scrambled)
  4. 3. Working capital management includes decisions concerning which of the following?

    I. accounts payable
    II. accounts receivable
    III. long-term debt
    IV. inventory

    A. I and II only
    B. I, II, and IV only
    C. I and III only
    D. I, III, and IV only
    E. II and IV only
    B. I, II, and IV only
    (this multiple choice question has been scrambled)
  5. Working capital management:
    A. ensures that dividends are paid to all stockholders on an annual basis.
    B. ensures that sufficient equipment is available to produce the amount of product desired on a daily basis.
    C. is concerned with managing day to day cash flow.
    D. balances the amount of company debt to the amount of available equity.
    E. ensures that long-term debt is acquired at the lowest possible cost.
    C. is concerned with managing day to day cash flow.
    (this multiple choice question has been scrambled)
  6. Which one of the following best describes the primary advantage of being a limited partner rather than a general partner?

    A. Ability to manage the day-to-day affairs of the business
    B. Entitlement to a larger portion of the partnership's income
    C. Greater management responsibility
    D. No potential financial loss
    E. Liability for firm debts limited to the capital invested
    E. Liability for firm debts limited to the capital invested
    (this multiple choice question has been scrambled)
  7. A general partner:
    A. cannot lose more than the amount of his/her equity investment.
    B. has less legal liability than a limited partner.
    C. faces double taxation whereas a limited partner does not.
    D. has more management responsibility than a limited partner.
    E. is the term applied only to corporations which invest in partnerships.
    D. has more management responsibility than a limited partner.
    (this multiple choice question has been scrambled)
  8. A partnership:
    A. agreement defines whether the business income will be taxed like a partnership or a corporation.
    B. has less of an ability to raise capital than a proprietorship.
    C. terminates at the death of any general partner.
    D. allows for easy transfer of interest from one general partner to another.
    E. is taxed the same as a corporation.
    C. terminates at the death of any general partner.
    (this multiple choice question has been scrambled)
  9. Which of the following are disadvantages of a partnership?
    I. limited life of the firm
    II. personal liability for firm debt
    III. greater ability to raise capital than a sole proprietorship
    IV. lack of ability to transfer partnership interest
    A. I and II only
    B. I, III, and IV only
    C. I, II, and IV only
    D. III and IV only
    E. II and III only
    C. I, II, and IV only
    (this multiple choice question has been scrambled)
  10. Which of the following are advantages of the corporate form of business ownership?
    I. limited liability for firm debt
    II. double taxation
    III. ability to raise capital
    IV. unlimited firm life
    A. II, III, and IV only
    B. I, III, and IV only
    C. I and II only
    D. III and IV only
    E. I, II, and III only
    B. I, III, and IV only
    (this multiple choice question has been scrambled)
  11. Which one of the following statements is correct?
    A. All types of business formations have limited lives.
    B. Both partnerships and corporations incur double taxation.
    C. Partnerships are the most complicated type of business to form.
    D. Both partnerships and corporations have limited liability for general partners and shareholders.
    E. Both sole proprietorships and partnerships are taxed in a similar fashion.
    E. Both sole proprietorships and partnerships are taxed in a similar fashion
    (this multiple choice question has been scrambled)
  12. The owners of a limited liability company prefer:
    A. being taxed like a corporation.
    B. having liability exposure similar to that of a sole proprietor.
    C. being taxed personally on all business income.
    D. having liability exposure similar to that of a general partner.
    E. being taxed like a corporation with liability like a partnership. 
    being taxed personally on all business income.
  13. Which type of business organization has all the respective rights and privileges of a legal person?
    A. Limited partnership
    B. Sole proprietorship
    C. Corporation
    D. General partnership
    E. Limited liability company
    C. Corporation
    (this multiple choice question has been scrambled)
  14. 13. Which one of the following actions by a financial manager creates an agency problem?
    A. Refusing to lower selling prices if doing so will reduce the net profits
    B. Agreeing to pay bonuses based on the book value of the company stock
    C. Increasing current costs in order to increase the market value of the stockholders' equity
    D. Refusing to borrow money when doing so will create losses for the firm
    E. Agreeing to expand the company at the expense of stockholders' value
    E. Agreeing to expand the company at the expense of stockholders' value
    (this multiple choice question has been scrambled)
  15. Which of the following help convince managers to work in the best interest of the stockholders?
    I. compensation based on the value of the stock
    II. stock option plans
    III. threat of a proxy fight
    IV. threat of conversion to a partnership

    A. I, II, III, and IV
    B. II and III only
    C. I, II and III only
    D. I and II only
    E. I and III only
    C. I, II and III only
    (this multiple choice question has been scrambled)
  16. A proxy fight occurs when
    A. the firm is declared insolvent
    B. the firm files for bankruptcy
    C. a competitor offers to sell their ownership in the firm
    D. the board solicits renewal of current members
    E. a group solicits proxies to replace the board of directors
    E. a group solicits proxies to replace the board of directors
    (this multiple choice question has been scrambled)
  17. Which of the following are key requirements of the Sarbanes-Oxley Act?
    I. Officers of the corporation must review and sign annual reports.
    II. Officers of the corporation must now own more than 5% of the firm's stock
    III. Annual reports must list deficiencies in internal controls.
    IV. Annual reports must be filed with the SEC within 30 days of year end.
    A. I only
    B. II only
    C. I and III only
    D. II and III only
    E. II and IV only
    I and III only
  18. Insider trading is:
    A. impossible to have in our efficient market
    B. legal.
    C. discouraged, but legal.
    D. illegal.
    E. list only the securities of the largest firms.
    D. illegal.
    (this multiple choice question has been scrambled)
  19. The Securities Exchange Act of 1934 focuses on:
    A. all stock transactions.
    B. issuance of new securities.
    C. sales of existing securities.
    D. Federal Deposit Insurance Corporation (FDIC) insurance.
    E. insider trading.
    E. insider trading.
    (this multiple choice question has been scrambled)
  20. The basic regulatory framework in the United States was provided by:
    A. the Securities Act of 1933.
    B. the monetary system.
    C. the Securities Exchange Act of 1934.
    D. A and C.E. All of the above.
    D. A and C.
  21. Accounting profits and cash flows are:
    A. generally the same since accounting profits reflect when the cash flows are received.
    B. generally not the same because cash inflows occur before revenue recognition.
    C. generally not the same since GAAP allows for revenue recognition separate from the receipt of cash flows.
    D. generally the same since they reflect current laws and accounting standards.
    E. Both c and d.
    C. generally not the same since GAAP allows for revenue recognition separate from the receipt of cash flows.
    (this multiple choice question has been scrambled)
  22. 21. Martha's Enterprises spent $2,400 to purchase equipment three years ago. This equipment is currently valued at $2,000 on today's balance sheet but could actually be sold for $2,000. Net working capital is $300 and long-term debt is $900. Assuming the equipment is the firm's only fixed asset, what is the book value of shareholders' equity? 
    A. $200
    B. $800
    C. $1,200
    D. $1,400
    E. The answer cannot be determined from the information provided.
    • D. $1,400
    • Book value of shareholders' equity = $2,000 + $300 - $900 = $1,400
  23. Art's Boutique has sales of$640,000 and costs of $480,000. Interest expense is $40,000 and depreciation is$60,000. The tax rate is 34%.
    What is the net income? 
    A. $20,400
    B. $39,600
    C. $50,400
    D. $79,600
    E. $99,600.
    • B. $39,600
    • Taxable income = $640,000 - $480,000 - $40,000 - $60,000 = $60,000; Tax = .34($60,000) = $20,400; Net income = $60,000 - $20,400 = $39,600
  24. Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $126,500?                            
    A. 21.38%
    B. 23.88%
    C. 25.76%
    D. 34.64%
    E. 39.00%
    • C. 25.76%
    • Tax = .15($50,000) + .25($25,000) + .34($25,000) +.39($126,500 - $100,000) = $32,585; Average tax rate = $32,585 ¸ $126,500 = .2576 = 25.76 percent
  25. The tax rates are as shown. Your firm currently has taxable income of $74,000. How much additional tax will you owe if you increase your taxable income by $20,000?                            
    A. $6,710
    B. $6,940
    C. $7,174
    D. $6,460
    E. $7,160
    A. $6,710C
    (this multiple choice question has been scrambled)
  26. Teddy's Pillows has beginning net fixed assets of $600 and ending net fixed assets of $730. Assets valued at $400 were sold during the year. Depreciation was $50.
    What is the amount of net capital spending? 
    A. $130
    B. $180
    C. $330
    D. $165
    E. $150
    B. $180
    (this multiple choice question has been scrambled)
  27. At the beginning of the year, long-term debt of a firm is $270 and total debt is $340. At the end of the year, long-term debt is $290 and total debt is $390. The interest paid is $40. What is the amount of the cash flow to creditors? 
    A. -$20
    B. $60
    C. $20
    D. $50
    E. -$50
    C. $20
    (this multiple choice question has been scrambled)
  28. Peggy Grey's Cookies has net income of $360. The firm pays out 40 percent of the net income to its shareholders as dividends. During the year, the company sold $80 worth of common stock. What is the cash flow to stockholders? 
    A. $144
    B. $64
    C. $296
    D. $224
    E. $136
    B. $64
    (this multiple choice question has been scrambled)
  29.  
                               

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