MGMT 200 Purdue Final exam with |\ |\ |\ |\ |\ |\
answers
One can obtain a clear picture of a company's liquidity
|\ |\ |\ |\ |\ |\ |\ |\ |\
by referring to its
|\ |\ |\
A. Balance Sheet.
|\ |\
B. Income Statement - CORRECT ANSWERS ✔✔A. Balance
|\ |\ |\ |\ |\ |\ |\
Sheet
|\
(liquidity refers to assets / cash, while income statement
|\ |\ |\ |\ |\ |\ |\ |\ |\
only deals with revenues, expenses, and profits)
|\ |\ |\ |\ |\ |\
The advantages of obtaining funds by issuing debt,
|\ |\ |\ |\ |\ |\ |\
rather than issuing additional common stock, include
|\ |\ |\ |\ |\ |\
which of the following? |\ |\ |\
A. Funds are obtained without surrendering
|\ |\ |\ |\ |\
ownership control. |\
B. Funds are obtained without surrendering
|\ |\ |\ |\ |\
ownership control, as well as, interest expense |\ |\ |\ |\ |\ |\
is tax‐deductible.
|\
C. The company's default risk decreases.
|\ |\ |\ |\ |\
,D. Interest expense is tax‐deductible. - CORRECT
|\ |\ |\ |\ |\ |\ |\
ANSWERS ✔✔B. Funds are obtained without surrendering|\ |\ |\ |\ |\ |\ |\
ownership control, as well as, interest expense is tax- |\ |\ |\ |\ |\ |\ |\ |\
deductible.
(but mostly the fact that it is done without surrendering
|\ |\ |\ |\ |\ |\ |\ |\ |\ |\
ownership of the company) |\ |\ |\
Banks will charge a very profitable company a higher
|\ |\ |\ |\ |\ |\ |\ |\
interest rate as compared to a company with minimal
|\ |\ |\ |\ |\ |\ |\ |\
income since the high‐income business will be better
|\ |\ |\ |\ |\ |\ |\
able to pay the extra interest cost.
|\ |\ |\ |\ |\ |\
A. True
|\
B. False - CORRECT ANSWERS ✔✔B. Absorutery not
|\ |\ |\ |\ |\ |\ |\
Banks do the opposite; they charge lower interest rates to
|\ |\ |\ |\ |\ |\ |\ |\ |\
profitable companies to attract their business because
|\ |\ |\ |\ |\ |\ |\ |\
there is less risk involved with profitable companies.
|\ |\ |\ |\ |\ |\ |\
The lower the debt to equity ratio, the greater the
|\ |\ |\ |\ |\ |\ |\ |\ |\
financial risk the company is taking. |\ |\ |\ |\ |\
A. True
|\
B. False - CORRECT ANSWERS ✔✔B. Nuh uh
|\ |\ |\ |\ |\ |\ |\
|\
,This makes sense because a LOWER debt to equity ratio
|\ |\ |\ |\ |\ |\ |\ |\ |\ |\
means (debt/equity) is small which means debt is small
|\ |\ |\ |\ |\ |\ |\ |\ |\
compared to equity, so therefore a LOWER debt to equity |\ |\ |\ |\ |\ |\ |\ |\ |\ |\
ratio would imply the opposite; the company would be
|\ |\ |\ |\ |\ |\ |\ |\ |\
more financially stable.
|\ |\
Cash flow generally limits the amount of debt a
|\ |\ |\ |\ |\ |\ |\ |\
business can finance. |\ |\
A. True
|\
B. False - CORRECT ANSWERS ✔✔A. True
|\ |\ |\ |\ |\ |\
Borrowing levels can INCREASE with *stable* and |\ |\ |\ |\ |\ |\ |\
*predictive* cash flows |\ |\
Think about credit score; the better credit score (more
|\ |\ |\ |\ |\ |\ |\ |\ |\
stable and predictive your credit is) then the higher loans
|\ |\ |\ |\ |\ |\ |\ |\ |\ |\
you can take out.
|\ |\ |\
A debt to equity ratio of approximately .34 means that
|\ |\ |\ |\ |\ |\ |\ |\ |\
one‐fourth of the company's assets are financed by |\ |\ |\ |\ |\ |\ |\
creditors.
A. True
|\
B. False - CORRECT ANSWERS ✔✔A. Thomas the tank
|\ |\ |\ |\ |\ |\ |\ |\ |\
engine says tru tru |\ |\ |\
, indicates creditors are financing 25% |\ |\ |\ |\
of the company's assets
|\ |\ |\
.34 is approximately .33 or 1/3
|\ |\ |\ |\ |\
This means you have "1" debt for every "3" equity so for
|\ |\ |\ |\ |\ |\ |\ |\ |\ |\ |\ |\
example:
Asset (200) = Debt (50) + Equity (150)
|\ |\ |\ |\ |\ |\ |\
Debt/equity = 1/3 |\ |\
A callable bond allows the *holder* to repay the bonds
|\ |\ |\ |\ |\ |\ |\ |\ |\
before their scheduled maturity date at a specified call
|\ |\ |\ |\ |\ |\ |\ |\
price.
A. True
|\
B. False - CORRECT ANSWERS ✔✔B. Mmmmm no, not
|\ |\ |\ |\ |\ |\ |\ |\ |\
quite
Holder means the person who issued the bond while
|\ |\ |\ |\ |\ |\ |\ |\ |\
*borrower* means the person who bought the bond. |\ |\ |\ |\ |\ |\ |\ |\
answers
One can obtain a clear picture of a company's liquidity
|\ |\ |\ |\ |\ |\ |\ |\ |\
by referring to its
|\ |\ |\
A. Balance Sheet.
|\ |\
B. Income Statement - CORRECT ANSWERS ✔✔A. Balance
|\ |\ |\ |\ |\ |\ |\
Sheet
|\
(liquidity refers to assets / cash, while income statement
|\ |\ |\ |\ |\ |\ |\ |\ |\
only deals with revenues, expenses, and profits)
|\ |\ |\ |\ |\ |\
The advantages of obtaining funds by issuing debt,
|\ |\ |\ |\ |\ |\ |\
rather than issuing additional common stock, include
|\ |\ |\ |\ |\ |\
which of the following? |\ |\ |\
A. Funds are obtained without surrendering
|\ |\ |\ |\ |\
ownership control. |\
B. Funds are obtained without surrendering
|\ |\ |\ |\ |\
ownership control, as well as, interest expense |\ |\ |\ |\ |\ |\
is tax‐deductible.
|\
C. The company's default risk decreases.
|\ |\ |\ |\ |\
,D. Interest expense is tax‐deductible. - CORRECT
|\ |\ |\ |\ |\ |\ |\
ANSWERS ✔✔B. Funds are obtained without surrendering|\ |\ |\ |\ |\ |\ |\
ownership control, as well as, interest expense is tax- |\ |\ |\ |\ |\ |\ |\ |\
deductible.
(but mostly the fact that it is done without surrendering
|\ |\ |\ |\ |\ |\ |\ |\ |\ |\
ownership of the company) |\ |\ |\
Banks will charge a very profitable company a higher
|\ |\ |\ |\ |\ |\ |\ |\
interest rate as compared to a company with minimal
|\ |\ |\ |\ |\ |\ |\ |\
income since the high‐income business will be better
|\ |\ |\ |\ |\ |\ |\
able to pay the extra interest cost.
|\ |\ |\ |\ |\ |\
A. True
|\
B. False - CORRECT ANSWERS ✔✔B. Absorutery not
|\ |\ |\ |\ |\ |\ |\
Banks do the opposite; they charge lower interest rates to
|\ |\ |\ |\ |\ |\ |\ |\ |\
profitable companies to attract their business because
|\ |\ |\ |\ |\ |\ |\ |\
there is less risk involved with profitable companies.
|\ |\ |\ |\ |\ |\ |\
The lower the debt to equity ratio, the greater the
|\ |\ |\ |\ |\ |\ |\ |\ |\
financial risk the company is taking. |\ |\ |\ |\ |\
A. True
|\
B. False - CORRECT ANSWERS ✔✔B. Nuh uh
|\ |\ |\ |\ |\ |\ |\
|\
,This makes sense because a LOWER debt to equity ratio
|\ |\ |\ |\ |\ |\ |\ |\ |\ |\
means (debt/equity) is small which means debt is small
|\ |\ |\ |\ |\ |\ |\ |\ |\
compared to equity, so therefore a LOWER debt to equity |\ |\ |\ |\ |\ |\ |\ |\ |\ |\
ratio would imply the opposite; the company would be
|\ |\ |\ |\ |\ |\ |\ |\ |\
more financially stable.
|\ |\
Cash flow generally limits the amount of debt a
|\ |\ |\ |\ |\ |\ |\ |\
business can finance. |\ |\
A. True
|\
B. False - CORRECT ANSWERS ✔✔A. True
|\ |\ |\ |\ |\ |\
Borrowing levels can INCREASE with *stable* and |\ |\ |\ |\ |\ |\ |\
*predictive* cash flows |\ |\
Think about credit score; the better credit score (more
|\ |\ |\ |\ |\ |\ |\ |\ |\
stable and predictive your credit is) then the higher loans
|\ |\ |\ |\ |\ |\ |\ |\ |\ |\
you can take out.
|\ |\ |\
A debt to equity ratio of approximately .34 means that
|\ |\ |\ |\ |\ |\ |\ |\ |\
one‐fourth of the company's assets are financed by |\ |\ |\ |\ |\ |\ |\
creditors.
A. True
|\
B. False - CORRECT ANSWERS ✔✔A. Thomas the tank
|\ |\ |\ |\ |\ |\ |\ |\ |\
engine says tru tru |\ |\ |\
, indicates creditors are financing 25% |\ |\ |\ |\
of the company's assets
|\ |\ |\
.34 is approximately .33 or 1/3
|\ |\ |\ |\ |\
This means you have "1" debt for every "3" equity so for
|\ |\ |\ |\ |\ |\ |\ |\ |\ |\ |\ |\
example:
Asset (200) = Debt (50) + Equity (150)
|\ |\ |\ |\ |\ |\ |\
Debt/equity = 1/3 |\ |\
A callable bond allows the *holder* to repay the bonds
|\ |\ |\ |\ |\ |\ |\ |\ |\
before their scheduled maturity date at a specified call
|\ |\ |\ |\ |\ |\ |\ |\
price.
A. True
|\
B. False - CORRECT ANSWERS ✔✔B. Mmmmm no, not
|\ |\ |\ |\ |\ |\ |\ |\ |\
quite
Holder means the person who issued the bond while
|\ |\ |\ |\ |\ |\ |\ |\ |\
*borrower* means the person who bought the bond. |\ |\ |\ |\ |\ |\ |\ |\
