Fin 534 quiz 5 (30 questions with answers) 99,99 % scored
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    Fin 534 quiz 5 (30 questions with answers) 99,99 % scored Fin 534 quiz 5 (30 questions with answers) 99,99 % scored Document Transcript

    • FIN 534 Quiz 5 (30 questions with answers) 99,99 % Scored PLEASE DOWNLOAD HEREQuestion 1Which of the following items is NOT included in current assets?AnswerAccounts receivable.Inventory.Bonds.Cash.Short-term, highly liquid, marketable securities.2 pointsQuestion 2Which of the following factors could explain why Dellva Energy had a negative netcash flow last year, even though the cash on its balance sheet increased?AnswerThe company sold a new issue of bonds.The company made a large investment in new plant and equipment.The company paid a large dividend.The company had high amortization expenses.The company repurchased 20% of its common stock.2 pointsQuestion 3Aubey Aircraft recently announced that its net income increased sharply from theprevious year, yet its net cash flow from operations declined. Which of thefollowing could explain this performance?
    • AnswerThe company’s operating income declined.The company’s expenditures on fixed assets declined.The company’s cost of goods sold increased.The company’s depreciation and amortization expenses declined.The company’s interest expense increased.2 pointsQuestion 4Which of the following statements is CORRECT?AnswerSince depreciation is a source of funds, the more depreciation a company has,the larger its retained earnings will be, other things held constant.A firm can show a large amount of retained earnings on its balance sheet yetneed to borrow cash to make required payments.Common equity includes common stock and retained earnings, less accumulateddepreciation.The retained earnings account as shown on the balance sheet shows the amountof cash that is available for paying dividends.If a firm reports a loss on its income statement, then the retained earningsaccount as shown on the balance sheet will be negative.2 pointsQuestion 5Analysts who follow Howe Industries recently noted that, relative to the previousyear, the company’s operating net cash flow increased, yet cash as reported onthe balance sheet decreased. Which of the following factors could explain thissituation?AnswerThe company cut its dividend.
    • The company made a large investment in a profitable new plant.The company sold a division and received cash in return.The company issued new common stock.The company issued new long-term debt.2 pointsQuestion 6Which of the following statements is CORRECT?AnswerSince companies can deduct dividends paid but not interest paid, our tax systemfavors the use of equity financing over debt financing, and this causes companies’debt ratios to be lower than they would be if interest and dividends were bothdeductible.Interest paid to an individual is counted as income for tax purposes and taxed atthe individual’s regular tax rate, which in 2008 could go up to 35%, but dividendsreceived were taxed at a maximum rate of 15%.The maximum federal tax rate on corporate income in 2008 was 50%.Corporations obtain capital for use in their operations by borrowing and by raisingequity capital, either by selling new common stock or by retaining earnings. Thecost of debt capital is the interest paid on the debt, and the cost of the equity isthe dividends paid on the stock. Both of these costs are deductible from incomewhen calculating income for tax purposes.The maximum federal tax rate on personal income in 2008 was 50%.2 pointsQuestion 7Below are the 2008 and 2009 year-end balance sheets for Wolken Enterprises:Assets: 2009 2008Cash $ 200,000 $ 170,000Accounts receivable 864,000 700,000Inventories 2,000,000 1,400,000
    • Total current assets $ 3,064,000 $2,270,000Net fixed assets 6,000,000 5,600,000Total assets $ 9,064,000 $7,870,000Liabilities and equity:Accounts payable $ 1,400,000 $1,090,000Notes payable 1,600,000 1,800,000Total current liabilities $ 3,000,000 $2,890,000Long-term debt 2,400,000 2,400,000Common stock 3,000,000 2,000,000Retained earnings 664,000 580,000Total common equity $ 3,664,000 $2,580,000Total liabilities and equity $ 9,064,000 $7,870,000Wolken has never paid a dividend on its common stock, and it issued $2,400,000of 10-year non-callable, long-term debt in 2008. As of the end of 2009, none ofthe principal on this debt had been repaid. Assume that the company’s sales in2008 and 2009 were the same. Which of the following statements must beCORRECT?AnswerWolken increased its short-term bank debt in 2009.Wolken issued long-term debt in 2009.Wolken issued new common stock in 2009.Wolken repurchased some common stock in 2009.Wolken had negative net income in 2009.2 pointsQuestion 8Which of the following statements is CORRECT?Answer
    • One way to increase EVA is to achieve the same level of operating income butwith more investor-supplied capital.If a firm reports positive net income, its EVA must also be positive.One drawback of EVA as a performance measure is that it mistakenly assumesthat equity capital is free.One way to increase EVA is to generate the same level of operating income butwith less investor-supplied capital.Actions that increase reported net income will always increase net cash flow.2 pointsQuestion 9Which of the following would be most likely to occur in the year after Congress, inan effort to increase tax revenue, passed legislation that forced companies todepreciate equipment over longer lives? Assume that sales, other operatingcosts, and tax rates are not affected, and assume that the same depreciationmethod is used for tax and stockholder reporting purposes.AnswerCompanies’ net operating profits after taxes (NOPAT) would decline.Companies’ physical stocks of fixed assets would increase.Companies’ net cash flows would increase.Companies’ cash positions would decline.Companies’ reported net incomes would decline.2 pointsQuestion 10Which of the following statements is CORRECT?AnswerIn the statement of cash flows, a decrease in accounts receivable is reported as ause of cash.Dividends do not show up in the statement of cash flows because dividends areconsidered to be a financing activity, not an operating activity.
    • In the statement of cash flows, a decrease in accounts payable is reported as ause of cash.In the statement of cash flows, depreciation charges are reported as a use ofcash.In the statement of cash flows, a decrease in inventories is reported as a useof cash.2 pointsQuestion 11Which of the following statements is CORRECT?AnswerOperating cash flow (OCF) is defined as follows:(1-T) - Depreciation and Amortization.Changes in working capital have no effect on free cash flow.Free cash flow (FCF) is defined as follows:(1 - T)+ Depreciation and Amortization- Capital expenditures required to sustain operations- Required changes in net operating working capital.Free cash flow (FCF) is defined as follows:(1-T)+ Depreciation and Amortization + Capital expenditures.Operating cash flow is the same as free cash flow (FCF).2 pointsQuestion 12For managerial purposes, i.e., making decisions regarding the firms operations,the standard financial statements as prepared by accountants under GenerallyAccepted Accounting Principles (GAAP) are often modified and used to createalternative data and metrics that provide a somewhat different picture of a firms
    • operations. Related to these modifications, which of the following statements isCORRECT?AnswerThe standard statements make adjustments to reflect the effects of inflation onasset values, and these adjustments are normally carried into any adjustment thatmanagers make to the standard statements.The standard statements focus on accounting income for the entire corporation,not cash flows, and the two can be quite different during any given accountingperiod. However, for valuation purposes we need to discount cash flows, notaccounting income. Moreover, since many firms have a number of separatedivisions, and since division managers should be compensated on their divisions’performance, not that of the entire firm, information that focuses on the divisionsis needed. These factors have led to the development of information that isfocused on cash flows and the operations of individual units.The standard statements provide useful information on the firm’s individualoperating units, but management needs more information on the firm’s overalloperations than the standard statements provide.The standard statements focus on cash flows, but managers are less concernedwith cash flows than with accounting income as defined by GAAP.The best feature of standard statements is that, if they are prepared under GAAP,the data are always consistent from firm to firm. Thus, under GAAP, there is noroom for accountants to “adjust” the results to make earnings look better.2 pointsQuestion 13Other things held constant, which of the following actions would increase theamount of cash on a company’s balance sheet?AnswerThe company repurchases common stock.The company pays a dividend.The company issues new common stock.The company gives customers more time to pay their bills.The company purchases a new piece of equipment.
    • 2 pointsQuestion 14A security analyst obtained the following information from Prestopino Products’financial statements:− Retained earnings at the end of 2009 were $700,000, but retained earnings atthe end of 2010 had declined to $320,000.− The company does not pay dividends.– The company’s depreciation expense is its only non-cash expense; it has noamortization charges.– The company has no non-cash revenues.–The company’s net cash flow (NCF) for 2010 was $150,000.On the basis of this information, which of the following statements is CORRECT?AnswerPrestopino had negative net income in 2010.Prestopino’s depreciation expense in 2010 was less than $150,000.Prestopino had positive net income in 2010, but its income was less than its 2009income.Prestopinos NCF in 2010 must be higher than its NCF in 2009.Prestopino’s cash on the balance sheet at the end of 2010 must be lower than thecash it had on the balance sheet at the end of 2009.2 pointsQuestion 15Which of the following statements is CORRECT?AnswerThe balance sheet for a given year, say 2008, is designed to give us an idea ofwhat happened to the firm during that year.The balance sheet for a given year, say 2008, tells us how much money thecompany earned during that year.
    • The difference between the total assets reported on the balance sheet and thedebts reported on this statement tells us the current market value of thestockholders equity, assuming the statements are prepared in accordance withgenerally accepted accounting principles (GAAP).For most companies, the market value of the stock equals the book value of thestock as reported on the balance sheet.A typical industrial company’s balance sheet lists the firms assets that will beconverted to cash first, and then goes on down to list the firms longest livedassets last.2 pointsQuestion 16Which of the following statements is CORRECT?AnswerA reduction in inventories held would have no effect on the current ratio.An increase in inventories would have no effect on the current ratio.If a firm increases its sales while holding its inventories constant, then, otherthings held constant, its inventory turnover ratio will increase.A reduction in the inventory turnover ratio will generally lead to an increase in theROE.If a firm increases its sales while holding its inventories constant, then, otherthings held constant, its inventory turnover ratio will decrease.2 pointsQuestion 17A firm wants to strengthen its financial position. Which of the following actionswould increase its quick ratio?AnswerOffer price reductions along with generous credit terms that would (1) enable thefirm to sell some of its excess inventory and (2)lead to an increase in accountsreceivable.Issue new common stock and use the proceeds to increase inventories.
    • Speed up the collection of receivables and use the cash generated to increaseinventories.Use some of its cash to purchase additional inventories.Issue new common stock and use the proceeds to acquire additional fixed assets.2 pointsQuestion 18HD Corp. and LD Corp. have identical assets, sales, interest rates paid on theirdebt, tax rates, and EBIT. However, HD uses more debt than LD. Which of thefollowing statements is CORRECT?AnswerWithout more information, we cannot tell if HD or LD would have a higher or lowernet income.HD would have the lower equity multiplier for use in the Du Pont equation.HD would have to pay more in income taxes.HD would have the lower net income as shown on the income statement.HD would have the higher net income as shown on the income statement.2 pointsQuestion 19Companies HD and LD have the same sales, tax rate, interest rate on their debt,total assets, and basic earning power. Both companies have positive netincomes. Company HD has a higher debt ratio and, therefore, a higher interestexpense. Which of the following statements is CORRECT?AnswerCompany HD pays less in taxes.Company HD has a lower equity multiplier.Company HD has a higher ROA.Company HD has a higher times interest earned (TIE) ratio.Company HD has more net income.
    • 2 pointsQuestion 20Considered alone, which of the following would increase a company’s currentratio?AnswerAn increase in net fixed assets.An increase in accrued liabilities.An increase in notes payable.An increase in accounts receivable.An increase in accounts payable.2 pointsQuestion 21Companies E and P each reported the same earnings per share (EPS), butCompany E’s stock trades at a higher price. Which of the following statements isCORRECT?AnswerCompany E probably has fewer growth opportunities.Company E is probably judged by investors to be riskier.Company E must have a higher market-to-book ratio.Company E must pay a lower dividend.Company E trades at a higher P/E ratio.2 pointsQuestion 22Which of the following statements is CORRECT?Answer
    • Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the sametime its profit margin rises from 9% to 10% and its debt increases from 40% oftotal assets to 60%. Under these conditions, the ROE will increase.Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the sametime its profit margin rises from 9% to 10% and its debt increases from 40% oftotal assets to 60%. Without additional information, we cannot tell what willhappen to the ROE.The modified Du Pont equation provides information about how operations affectthe ROE, but the equation does not include the effects of debt on the ROE.Other things held constant, an increase in the debt ratio will result in an increasein the profit margin on sales.Suppose a firm’s total assets turnover ratio falls from 1.0 to 0.9, but at the sametime its profit margin rises from 9% to 10%, and its debt increases from 40% oftotal assets to 60%. Under these conditions, the ROE will decrease.2 pointsQuestion 23Amram Company’s current ratio is 1.9. Considered alone, which of the followingactions would reduce the company’s current ratio?AnswerBorrow using short-term notes payable and use the proceeds to reduce accruals.Borrow using short-term notes payable and use the proceeds to reduce long-termdebt.Use cash to reduce accruals.Use cash to reduce short-term notes payable.Use cash to reduce accounts payable.2 pointsQuestion 24If a bank loan officer were considering a company’s request for a loan, which ofthe following statements would you consider to be CORRECT?Answer
    • The lower the company’s EBITDA coverage ratio, other things held constant, thelower the interest rate the bank would charge the firm.Other things held constant, the higher the debt ratio, the lower the interest ratethe bank would charge the firm.Other things held constant, the lower the debt ratio, the lower the interest rate thebank would charge the firm.The lower the company’s TIE ratio, other things held constant, the lower theinterest rate the bank would charge the firm.Other things held constant, the lower the current ratio, the lower the interest ratethe bank would charge the firm.2 pointsQuestion 25Which of the following statements is CORRECT?AnswerThe use of debt financing will tend to lower the basic earning power ratio, otherthings held constant.A firm that employs financial leverage will have a higher equity multiplier than anotherwise identical firm that has no debt in its capital structure.If two firms have identical sales, interest rates paid, operating costs, and assets,but differ in the way they are financed, the firm with less debt will generally havethe higher expected ROE.Holding bonds is better than holding stock for investors because income frombonds is taxed on a more favorable basis than income from stock.All else equal, increasing the debt ratio will increase the ROA.2 pointsQuestion 26Which of the following statements is CORRECT?Answer
    • If a security analyst saw that a firm’s days’ sales outstanding (DSO) was higherthan the industry average and was also increasing and trending still higher, thiswould be interpreted as a sign of strength.If a firm increases its sales while holding its accounts receivable constant, then,other things held constant, its days’ sales outstanding (DSO) will increase.There is no relationship between the days’ sales outstanding (DSO) and theaverage collection period (ACP). These ratios measure entirely different things.A reduction in accounts receivable would have no effect on the current ratio, but itwould lead to an increase in the quick ratio.If a firm increases its sales while holding its accounts receivable constant, then,other things held constant, its days’ sales outstanding will decline.2 pointsQuestion 27Which of the following statements is CORRECT?AnswerIf a firm has the highest price/earnings ratio of any firm in its industry, then, otherthings held constant, this suggests that the board of directors should fire thepresident.If a firm has the highest market/book ratio of any firm in its industry, then, otherthings held constant, this suggests that the board of directors should fire thepresident.Other things held constant, the higher a firm’s expected future growth rate, thelower its P/E ratio is likely to be.The higher the market/book ratio, then, other things held constant, the higher onewould expect to find the Market Value Added (MVA).If a firm has a history of high Economic Value Added (EVA) numbers each year,and if investors expect this situation to continue, then its market/book ratio andMVA are both likely to be below average.2 pointsQuestion 28If the CEO of a large, diversified, firm were filling out a fitness report on a divisionmanager (i.e., “grading” the manager), which of the following situations would be
    • likely to cause the manager to receive a better grade? In all cases, assume thatother things are held constant.AnswerThe division’s basic earning power ratio is above the average of other firms in itsindustry.The division’s total assets turnover ratio is below the average for other firms in itsindustry.The division’s debt ratio is above the average for other firms in the industry.The division’s inventory turnover is 6, whereas the average for its competitors is8.The division’s DSO (days’ sales outstanding) is 40, whereas the average for itscompetitors is 30.2 pointsQuestion 29Which of the following statements is CORRECT?AnswerIf Firms X and Y have the same P/E ratios, then their market-to-book ratios mustalso be the same.If Firms X and Y have the same net income, number of shares outstanding, andprice per share, then their P/E ratios must also be the same.If Firms X and Y have the same earnings per share and market-to-book ratio,they must have the same price earnings ratio.If Firm X’s P/E ratio exceeds that of Firm Y, then Y is likely to be less risky andalso to be expected to grow at a faster rate.If Firms X and Y have the same net income, number of shares outstanding, andprice per share, then their market-to-book ratios must also be the same.2 pointsQuestion 30Other things held constant, which of the following alternatives would increase
    • a company’s cash flow for the current year?AnswerIncrease the number of years over which fixed assets are depreciated for taxpurposes.Pay down the accounts payables.Reduce the days’ sales outstanding (DSO) without affecting sales or operatingcosts.Pay workers more frequently to decrease the accrued wages balance.Reduce the inventory turnover ratio without affecting sales or operating costs.2 points