Which of the following concerning the relationship between risk and return is correct?
Riskier investments tend to have higher returns
Which of the following concerning the relationship between risk and return is correct? 2
A risk averse investor would prefer a stock with an expected 10% return and standard deviation of 10% over a stock with an expected return of 10% and standard deviation of 20%
Calculate the stock return from the following information
Beg 30
Price 1 year later 34
Annaul dividend 1
(34-30)+1/30= 16.7%
Calcualte the stock return from the following information
Beg50
Ending 43
Annual dividend 1
(43-50)+1/50= -12%
A company that focuses on its operations to maintain a low days payable outstanding is an example of which of the following corporate financial decisions:
Working Capital Management
A company that decides to invest to expand its factory for a new product line is an example of which of the following corporate financial decisions
Capital Budgeting
Which of the following is part of the treasurer's function?
Making capital expenditures
Which of the following is part of the controller's functions
Preparing financial statements and reports
According to the Theory of Efficient Capital Markets
Current stock prices reflect all publicly available information
According to The Theory of Efficient Capital Markets
Stock prices react instantaneously to new information
Given the following information, a rational investor would most likely invest in which stock?
A mean return 15% standard deviation of 10%
B mean return 15% standard deviation of 14%
Stock A because it is not as risky as Stock B
Given the following information, a rational investor would most likely invest in which stock?
A mean return 8% standard deviation of 10%
B mean return 8% standard deviation of 7%
Stock B because it is not as risky as Stock A
Which of the following statements about Business Organizational Forms is true?
Raising capital is easier for corporations than for sole proprietorships
Which of the following statements about Business Organizational forms is true?
Owners of Corporations have limited liability
The time value of money implies that:
A dollar today is worth more than a dollar tomorrow
The time value of money implies that:
A dollar tomorrow is worth less than a dollar today
Which of the following is a tenet of good management according to Gordan Gekko?
Management should have ownership in the company
Which of the following is a principal held by Gordan Gekko?
Management must be accountable to the shareholders
What is the market capitalization?
stock price 30
Earnings per share 5
price/earnings ratio:16
Shares outstanding:250 million
Shares outstanding x stock price
250 million x 30= 7.5 billion
What is the market capitalization?
stock price 20
Earnings per share 4
price/earnings ratio:9
Shares outstanding:50 million
Shares outstanding x stock price
50 million x 20= 1 billion
Which activity is the most likely to increase shareholder value?
Minimizing the company's cost of capital
Which activity is the most likely to increase shareholder value?
Allocating capital to investments with the highest risk-adjusted return
In the event of a liquidation of a company which stakeholders are owed only the firm's residual cash flows
Stockholders
In the event of a liquidation of a company which stakeholders are not protected by contracts
Stockholders
Which of the following is an example of the agency problem?
Management invests in a project that serves the interest of management more than shareholders
Which of the following is an example of the agency problem?
Corporate Management invests in a negative ROI project because it will result in large bonuses and kickbacks for all senior executives
Which of the following is an example of an internal control mechanism used to ensure that management acts in shareholder interest?
Audited Financial Statements
Which of the following is an example of an external control mechanism used to ensure that management acts in shareholders interests?
Shareholder Activism
Which of the following responsibilities fall under the CFO's role as the company's treasurer?
Capital Expenditures
The _____ is consider one of the CFO's traditional responsibilities as financial engineer?
Controller functions
Which one of the following is an element of the new corporate finance environment?
Institutionalization of markets
Which one of the following is an element of the new corporate finance environment?
Greater economic volatility and risk
Which of the following drives stock price in the short run?
Supply and Demand
Which of the following drives stock price in the long run?
Earnings
Warren Buffet prefers companies with which of the following characteristics?
Companies the generate free cash flow
What is Berkshire Hathaways primary business?
Insurance
Which of the following is not a principle used in investment decisions by Warren Buffet?
Invest in high growth companies
According to Behavioral Finance, which of the following statements is true?
Prices reflection emotions and biases
According to Traditional Finance, which of the following statements are true?
Prices reflect expected outcomes
Which of the following is a disadvantage of the Corporate Organization Form?
Double Taxation
Which of the following is an advantage of the Corporate Organizational Form?
Easy to raise capital
Which is the primary reason that corporations are the most prevalent organizational form?
The ease of raising capital
Which of the following is true about financial markets?
The alternative to allocating capital through markets is for the government to allocate capital
What distinguishes Debt and Equity Markets from other capital markets
They are where companies raise funds to finance growth
Which of the following is true about creating shareholder value?
Activist investors such as Carl Icahn attempt to force companies to create shareholder value
Which of the following is true regarding the challenges to management?
There is too much of an emphasis on meeting short-term earnings estimates
A management team that creates shareholder value:
Generates return on investment greater than the cost of capital
Which financial ratios are used to determine management's effectiveness at creating shareholder value
Return on Investment & Cost of Capital
Which of the following is one of the three primary areas of finance?
Institutions and Markets
Which of the following is one of the three primary areas of Finance?
Investments
Traditionally, which of the following are responsibilities of the controller side of corporate financial organization?
Financial Statements, Financial Systems and Taxes
Traditionally, which of the following are responsibilities of the treasure side of a corporate financial organization?
Financial Planning,Capital Budgets and Cash Management
Which of the following is true regarding corporate governance?
The crisis in corporate governance was related to companies trying to meet Wall Streets expectations
How was corporate governance in 1990s different from corporate governance in the 1980s?
The 1990s involved more managerial stock ownership than 1980s
Which of the following describes the trend in corporate governance from 1980s to present?
Institutional investors are more active today compared to the 1980s
Why did Madoff's Ponzi scheme call apart?
There was a financial crisis and too many investors withdrew their money
Why was Madoof able to continue is Ponzi Scheme for 30+ years?
He attracted new investments faster than current investors withdrew their money
What country's corporate governance model is designed around the minority shareholders electing a board of directors?
'Merica
Which model of corporate governance is best described as companies being managed in the interest of majority shareholders?
Rest of the world model
Managerial defense mechanism that occurs when a company is target for hostile takeover and responds by selling off its prized assets is_____
Crown Jewels
Managerial defense mechanism does the target company look to fend off a hostile takeover by providing big bonuses to their executives if employment is terminated
Golden pararchutes
Which of the following would increase a company's cash flow?
Paying suppliers more slowly
Which of the following would reduce a company's cash flow?
Buying plant equipment
Which of the following will increase goodwill?
Buying a target company for a premium over its book value
Which of the following is true about goodwill?
It represents the premium over book value of an acquired corporation
Which of the following is NOT true of financial ratios?
Total Assets Turnover measures a company's efficiency at turning assets into profits
Which of the following is true of financial statements?
Net income plus interest and taxes equals operating profit
Which of the following is true about financial ratios?
A high accounts payable turnover indicates that the company pays its supplies quickly
Which of the following is true about financial ratios?
A low Days Sales outstanding indicates the company receives payment from its customers quickly
Calculate ROE
Profit Margin 15%
Total asset turnover 2.0
Inventory Turnover 1.2
Equity Multiplier .8
Current Ratio 1.7
PM x TAT=ROA x Equity Multiplier= ROE
.15x2=.3x.8=.24 or 24%
Calculate ROE
Profit Margin 8%
Total asset turnover 1.5
Inventory Turnover 2.4
Equity Multiplier 1.6
Current Ratio .9
PMxTAT=ROAxEQUITY
MULTIPLIER= ROE
.08x1.5=.12x1.6=.192 or 19%
Which would most likely cause a profitable company to run out of cash?
Increase in receivables and inventory
If a company has 18 days sale outstanding and the industry average is 29 which is certainly true about the company relative to the industry?
It is more efficient in collecting cash from its customers than the industry
If a company has 35 days payable outstanding and the industry average is 43 which is certainly trueabout the company relative to the industry?
It pays its supplies faster than the industry
Which of the following is TRUE regarding Company 123 given the following information?
Current Assets = $200
Fixed Assets = $310
Current Liabilities = $190
Long Term Debt = $140
Revenue = $450
Net Income = $90
Debt to Equity Ratio=0.78
Which of the following is TRUE regarding Company 456 given the following information?
Current Assets = $400
Fixed Assets = $150
Current Liabilities = $200
Long Term Debt = $75
Sales = $240
Net Income = $50
A. Shareholder Equity = $290
B. Current Ratio = 0
Return on Equity=18%
The matching Principal in GAAP
Matches the expense related to a sale in the same period
According to the Revenue recognition principle in GAAP
Revenue is recognized when a good or service is provided, not when the money is received.
If lenders want to assess the likelihood of borrowers being able to make interest payments, they would most likely look at which ratio
Liquidity ratios
If investors want to asses how efficient a company is at using its productive resources, they would look at which ratio?
Activity Ratio
Which financial ratio is of most interest to suppliers?
Current Ratio
On the income statement, which of the following line-items represents the income the company's managers receive?
Selling, General and Administrative Expenses
On the income statement, which of the following line-items represents the amount the company's creditors receive?
Interest Expense
If a company has a 10% ROA and 20% ROE and total assets of 100,000, what is the company's total equity?
50,000
If a company has a 5% ROA and 20% ROE and total equity of 100000 what is the companys total assets
400,000
In 2013 Acme co had a 8% ROA and total assets of 300000 if its net profit margin was 5% what were it's revenues
480,0000
Liquidity Ratios
Measures the firms ability to meet short term obligations
Suppliers look at this
Activity Ratios
Measure the company efficiency on the short term
Measures Management performance on short term
Profitability
Measures managers performance overall.
Leverage
Measure to which the firm uses debt and equity to finance operations
Higher leverage means higher risk