Question 1 Firms A and B have identical gross profit margins but B has a smaller operating profit margin. Which of the following is the most likely explanation? Firm B spends more on tax preparation expenses Firm B has more interest expense Firm B pays a lower tax rate Firm B has less depreciation expense none of the above is a likely explanation 4 points Question 2 Which of the following is a source of cash flow from operating activities? an increase in accounts receivable an increase in accounts payable the sale of a mainframe computer the sale of new shares of common stock a decrease in depreciation 4 points Question 3 Firm A's gross profit margin is much smaller than the other firms in the industry. Which of the following is the most likely explanation? Firm A has a brand-new, highly efficient production facility. Firm A faces a higher tax rate. Firm A uses too much middle management. Firm A is noted for selling inferior products Firm A has the only non-unionized workforce in the industry 4 points Question 4 A firm's ROE will be equal to their ROA if the firm uses no equity financing the firm uses only equity financing a firm's ROE will never equal their ROE a firm's ROE will always equal their ROE 4 points Question 5 Firms A, B and C all show a large increase in the cash account on their balance sheet from 2006 to 2007. Which firm would you prefer to invest in, assuming that you are a long-term investor? Firm A which generated the cash by a large positive cash flow from operating activities. Firm B which generated the cash by a large positive cash flow from investing activities Firm C which generated the cash by a large positive cash flow from financing activities 4 points Question 6 Which of the following is a source of externally generated equity financing? issuing new corporate bonds issuing new shares of common stock retained earnings bank loans collecting all of their outstanding accounts receivable 4 points Question 7 The goal of a publicly-owned corporation should be to maximize net income maximize earnings per share maximize shareholder wealth minimize risk 4 points Question 8 Retained earnings on the balance sheet represents net profits after taxes. cash. net profits after taxes minus preferred dividends. the cumulative total of earnings reinvested in the firm. 4 points Question 9 Which of the following are known as "fixed costs sources of financing"? 1. bonds; 2. common stock; 3 preferred stock 1 only 2 only 3 only 1 and 2 only 1 and 3 only 4 points Question 10 Which of the following are examples of a primary market transaction? A company "goes public" by holding their IPO (initial public offering). A company issues additional shares of common stock several years after their IPO An investor asks his broker to purchase 1,000 shares of Microsoft common stock. All of the statements above are correct. Statements a and b are correct. 4 points Question 11 A common size income statement is created by dividing all items on the income statement by net income sales total assets equity the number of shares of common stock outstanding 4 points Question 12 An increase in interest expense will ______________ a firm's net income and ___________ the firm's (net) cash flow. decrease, decrease decrease, increase increase, decrease increase, increase 4 points Question 13 Which of the following would increase a firm's cash flow from investing activities? a decrease in accounts payable a decrease in gross fixed assets issuing new shares of common stock a decrease accounts receivable the sale of a large amount of inventory for cash 4 points Question 14 The primary concern of a firm's suppliers when assessing the strength of a firm is the firm's return on assets times interest earned current ratio total asset turnover 4 points Question 15 A firm has a profit margin of 4%, a total asset turnover of 2x and a debt ratio of 50%. The firm's ROA=____ and the firm's ROE=_____. 2%, 4% 8%, 12% 4%, 12% 8%, 16% 4 points Question 16 Suppose a corporation issues $1,000,000 of new common stock and uses the money raised to repurchase (retire) some of their outstanding corporate bonds that have a coupon interest rate of 10%. The firm's total assets, sales and EBIT are unchanged. Which of the following will occur? 1. The firm's ROA will decrease; 2. The firm's TIE will decrease; 3. The firm's nPM will increase 1 only 2 only 3 only 1 and 2 only 1 and 3 only 4 points Question 17 Which of the following must be correct? Remember that BEP=EBIT/TA If a firm's BEP is 5% then their ROA is 5%. If a firm's ROA is 5% then their ROE is 5%. If a firm has no debt then their BEP is equal to their ROA. If a firm has no debt and pays no taxes then their BEP is equal to their ROA. 4 points Question 18 Which of the following statements is correct? Balance sheet numbers reflect current market values. Depreciation and interest are both non-cash expenses. Depreciation and interest are both tax-deductible expenses. Net fixed assets will always be greater than gross fixed assets. 4 points Question 19 There is talk today of the US government investing in private banks as a way to get additional cash into the banking systems. If you are think the cash infusion is a good idea, but you are extremely concerned about the government taking over control of the nation's banking system, you would prefer that the government purchase common stock in the primary market purchase common stock in the secondary market purchase corporate bonds in the primary market purchase corporate bonds in the secondary market 4 points Question 20 Rank the following from highest to lowest in terms of an individual investor's required rate of return: 1. ABC corporate bonds; ; 2. ABC preferred stock; 3. ABC common stock Hint: Remember the risk/return tradeoff and the priority of claims against income and assets. 1, 2, 3 3, 1, 2 3, 2, 1 2, 1, 3 2, 3, 1 4 points Question 21 Which of the following is sometimes referred to as "free financing"? The debt must be paid, but generally there is no interest obligation accompanying the debt. common equity accounts payable accounts receivable long-term debt bribes 4 points Question 22 ABC corporation has a below average profit margin yet their ROA is above average. Which of the following is correct? their ROE is above average their DSO (ACP) is below average their debt ratio is above average their TATO is above average none of the above answers is correct 4 points Question 23 A firm issues $1m of new debt with a coupon interest rate of 12% and uses the money to repurchase some of their own outstanding shares of common stock. Total assets is unchanged, only the mixture of debt and equity is affected. Which of the following statements must be correct? Assume no other changes. the firm's TIE will decrease the firm's ROA will decrease the firm's ROE will decrease both statements (a) and (b) are correct statements (a), (b) and (c) are all correct. 4 points Question 24 A firm's bond rating changes from BBB to AAA (they are now considered to be less risky). Which of the following is a likely explanation? 1. The firm's TIE changes from 2.0 to 11.0; 2. The firm's DSO changes from 20 to 40; 3. The firm's BEP (BEP=EBIT/TA) changes from 2% to 15% 1 only 2 only 3 only 1 and 2 only 1 and 3 only 4 points Question 25 Which of the following is an advantage of using new common stock financing compared to new debt financing? The cost of issuing (the floatation costs) are less for the common stock. New equity financing will not cause any dilution of ownership of the existing shareholders. New equity financing does not add any legal financial obligations to the firm. Issuing new shares of common stock will increase the firm's financial leverage (result in larger EM).