FI 360 Final Exam Questions and Answers Latest (Graded A+)

The primary operating goal of a publicly-owned firm trying to best serve its stockholders should be to 2/42 Since it is impossible to measure a stock's intrinsic value, the text states that it is better for managers to attempt to maximize the current stock price than its intrinsic value. Use a well-structured managerial compensation package to reduce conflicts that may exist between stockholders and managers. Maximize the firm's expected EPS, which must also maximize the firm's price per share. Minimize the firm's risks because most stockholders dislike risk. In turn, this will maximize the firm's stock price. Maximize managers' own interests, which are by definition consistent with maximizing shareholders' wealth. Question 2 5.5 / 5.5 pts Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT? Relaxant's shareholders (the ex-partners) will now be exposed to less liability. The company will probably be subject to fewer regulations and required disclosures. Assuming the firm is profitable, none of its income will be subject to federal income taxes. 3/42 The firm's investors will be exposed to less liability, but they will find it more difficult to transfer their ownership. The firm will find it more difficult to raise additional capital to support its growth. Question 3 5.5 / 5.5 pts Which of the following could explain why a business might choose to operate as a corporation rather than as a proprietorship or a partnership? Corporations generally find it easier to raise large amounts of capital. Less of a corporation's income is generally subject to federal taxes. Corporate investors are exposed to unlimited liability. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation. Corporations generally face fewer regulations. 4/42 Rationale: Outsiders thinking about investing in a business are generally not willing to be subjected to unlimited liability, and they also want to be able to sell their shares should they choose to do so. Corporations provide these advantages; hence, firms that need large amounts of capital that must be raised in capital markets generally choose to incorporate. Rationale: Outsiders thinking about investing in a business are generally not willing to be subjected to unlimited liability, and they also want to be able to sell their shares should they choose to do so. Corporations provide these advantages; hence, firms that need large amounts of capital that must be raised in capital markets generally choose to incorporate. Question 4 5.5 / 5.5 pts Which of the following is an example of a capital market instrument? Money market mutual funds. Banker's acceptances. Preferred stock. Commercial paper. U.S. Treasury bills. Question 5 5.5 / 5.5 pts 5/42 Which of the following statements is CORRECT? An example of a primary market transaction would be your uncle transferring 100 shares of Walmart stock to you as a birthday gift. Capital market instruments include both long-term debt and common stocks. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors. The NYSE does not exist as a physical location. Rather it represents a loose collection of dealers who trade stock electronically. Question 6 5.5 / 5.5 pts Analysts who follow Howe Industries recently noted that, relative to the previous year, the company's net cash provided from operations increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this situation? The company issued new common stock. The company made large investments in fixed assets. The company issued new long-term debt. The company sold a division and received cash in return. 6/42 The company cut its dividend. Question 7 5.5 / 5.5 pts Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet? The company gives customers more time to pay their bills. The company pays a dividend. The company repurchases common stock. The company purchases a new piece of equipment. The company issues new common stock. Question 8 5.5 / 5.5 pts Last year Besset Company's operations provided a negative cash flow, yet the cash shown on its balance sheet increased. Which of the following statements could explain the increase in cash, assuming the company's financial statements were prepared under generally accepted accounting principles (GAAP)? The company dramatically increased its capital expenditures. The company sold some of its fixed assets. The company repurchased some of its common stock. The company had high depreciation expenses. The company retired a large amount of its long-term debt. 7/42 Question 9 5.5 / 5.5 pts A loss incurred by a corporation Can be carried back 2 years, then carried forward up to 20 years following the loss. Can be carried back 3 years or forward 10 years, whichever is more advantageous to the firm. Cannot be used to reduce taxes in other years except with special permission from the IRS. Must be carried forward unless the company has had 2 loss years in a row. Can be carried back 5 years and forward 3 years. Question 10 5.5 / 5.5 pts A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio? Issue new common stock and use the proceeds to acquire additional fixed assets. Issue new common stock and use the proceeds to increase inventories. Use some of its cash to purchase additional inventories. 8/42 Speed up the collection of receivables and use the cash generated to increase inventories. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable. Question 11 5.5 / 5.5 pts Beranek Corp has $720,000 of assets (which equal total invested capital), and it uses no debt —it is financed only with common equity. The new CFO wants to employ enough debt to raise the total debt to total capital ratio to 40%, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio? $317,520 $302,400 $273,600 $288,000 $333,396 9/42 Rationale: Total assets = Total invested capital $720,000 Target debt to total capital ratio 40% Debt to achieve target ratio = Amount borrowed = Target % × Invested capital = $288,000 Rationale: Total assets = Total invested capital $720,000 Target debt to total capital ratio 40% Debt to achieve target ratio = Amount borrowed = Target % × Invested capital = $288,000 Question 12 5.5 / 5.5 pts If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (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 that other things are held constant. The division's inventory turnover is 6×, whereas the average for its competitors is 8×. The division's basic earning power ratio is above the average of other firms in its industry. 10/42 The division's DSO (days' sales outstanding) is 40 days, whereas the average for its competitors is 30 days. The division's total assets turnover ratio is below the average for other firms in its industry. The division's total debt to total capital ratio is above the average for other firms in the industry. Question 13 5.5 / 5.5 pts A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio? Use cash to increase inventory holdings. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year. Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash. Use cash to repurchase some of the company's own stock. Reduce the company's days' sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment. Question 14 5.5 / 5.5 pts 11/42 What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%? $17,449 $20,352 $19,334 $18,367 $16,576