Finance

Finance

1.
Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership?
 A) Corporations generally find it relatively difficult to raise large amounts of capital.
 B) Less of a corporation- income is generally subjected to taxes than would be true if the firm were a partnership.
 C) Corporate shareholders escape liability for the firm's debts, but this factor may be offset by the tax disadvantages of the corporate form of organization.
 D) Corporate investors are exposed to unlimited liability.
 E) Corporations generally face relatively few regulations.
2. 
Which of the following is a primary market transaction?
 A) You sell 200 shares of IBM stock on the NYSE through your broker.
 B) IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker.
 C) You buy 200 shares of IBM stock from your brother. The trade is not made through a broker--you just give him cash and he gives you the stock.
 D) One financial institution buys 200,000 shares of IBM stock from another institution. An investment banker arranges the transaction.
 E) You invest $10,000 in a mutual fund, which then uses the money to buy $10,000 of IBM shares on the NYSE.
3. 
Which of the following statements is CORRECT?
 A) One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt.
 B) Sole proprietorships are subject to more regulations than corporations.
 C) In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner.
 D) Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones.
 E) Corporations of all types are subject to the corporate income tax.
4. 
Which of the following statements is CORRECT?
 A) The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders’ equity.
 B) The balance sheet gives us a picture of the firm- financial position at a point in time.
 C) The income statement gives us a picture of the firm- financial position at a point in time.
 D) The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.
 E) The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.
5. 
Other things held constant, which of the following actions would increase the amount of cash on a company- balance sheet?
 A) The company repurchases common stock.
 B) The company pays a dividend.
 C) The company issues new common stock.
 D) The company gives customers more time to pay their bills.
 E) The company purchases a new piece of equipment. 
6. 
Which of the following statements is CORRECT?
 A) The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets.
 B) The statement of cash flows shows where the firm- cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit.
 C) The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital.
 D) The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock.
 E) The statement of cash flows shows how much the firm- cash--the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)--increased or decreased during a given year.
7. 
Considered alone, which of the following would increase a company- current ratio?
 A) An increase in net fixed assets.
 B) An increase in accrued liabilities.
 C) An increase in notes payable.
 D) An increase in accounts receivable.
 E) An increase in accounts payable.
8. 
Companies E and P each reported the same earnings per share (EPS), but Company E- stock trades at a higher price. Which of the following statements is CORRECT?
 A) Company E probably has fewer growth opportunities.
 B) Company E is probably judged by investors to be riskier.
 C) Company E must have a higher market-to-book ratio.
 D) Company E must pay a lower dividend.
 E) Company E trades at a higher P/E ratio.
9. 
If a bank loan officer were considering a company- request for a loan, which of the following statements would you consider to be CORRECT?
 A) The lower the company- EBITDA coverage ratio, other things held constant, the lower the interest rate the bank would charge the firm.
 B) Other things held constant, the higher the debt ratio, the lower the interest rate the bank would charge the firm.
 C) Other things held constant, the lower the debt ratio, the lower the interest rate the bank would charge the firm.
 D) The lower the company- TIE ratio, other things held constant, the lower the interest rate the bank would charge the firm.
 E) Other things held constant, the lower the current ratio, the lower the interest rate the bank would charge the firm.
10. 
Which of the following statements is CORRECT?
 A) If a security analyst saw that a firm- days’ sales outstanding (DSO) was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign of strength.
 B) If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding (DSO) will increase.
 C) There is no relationship between the days’ sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things.
 D) A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.
 E) If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding will decline.