COB 300 Finance Exam 1 Study Guide
Questions and Correct Answers
Question 1
How can debt leverage up a firm's ROE?
Correct Answer
if the firm earns more on its assets than the interest rate it pays on debt
Question 2
Pension Funds
Correct Answer
retirement plans funded by corporations or government agencies for their workers
and administered primarily by the trust departments of commercial banks or by life
insurance companies
Question 3
Alternative Minimum Tax
Correct Answer
Created by Congress to make it more difficult for wealthy individuals to avoid
paying taxes through the use of various deductions.
Question 4
Fixed Assets Turnover Ratio
Correct Answer
The ratio of sales to net fixed assets.
- measures how effectively the firm uses its plant and equipment
- ISSUE: they are shown on balance sheet as their historical costs less depreciation
so inflation may cause them to be understated
Page 1 of 29
,Question 5
Business Ethics
Correct Answer
thought of as the company's attitude and conduct toward its employees, customers,
community, and stockholders
Question 6
If a stock's actual price is greater than its intrinsic price then the stock is ___
Correct Answer
overvalued
Question 7
Stock's Intrinsic Value Depends on
Correct Answer
"true" investor cash flows + "true" risk
- where "true" means the cash flows and risk that investors would expect if they had
all the information that existed about a company
Question 8
What level of management causes the most problems?
Correct Answer
typically middle-level managers who are trying to boost their unit's profits and thus
their bonuses
Question 9
Market Price
Correct Answer
stock value based on perceived but possibly incorrect information as seen my the
marginal investor
Page 2 of 29
, Question 10
S Corporations
Correct Answer
A special designation that allows small businesses that meet qualifications to be
taxed as if they were a proprietorship or a partnership rather than a corporation.
- must have no more than 100 stockholders
Question 11
DuPont Equation
Correct Answer
ROE = Net Profit Margin x Asset Turnover x Equity Multiplier
Or...
Net Income / Equity
Question 12
Financial Management (Corporate Finance)
Correct Answer
focuses on decisions relating to how much and what type of assets to acquire, how
to raise the capital needed to purchase assets, and how to run the firm as to
maximize its value; same rules apply to both for-profit and not-for-profit
Question 13
Financial Intermediary
Correct Answer
when transfers are made through institutions such as banks, insurance companies,
or mutual funds
- they obtain funds from savers in exchange for its securities and uses these funds
to buy and hold business' securities
- they create new forms of capital, like CoD
Page 3 of 29
Questions and Correct Answers
Question 1
How can debt leverage up a firm's ROE?
Correct Answer
if the firm earns more on its assets than the interest rate it pays on debt
Question 2
Pension Funds
Correct Answer
retirement plans funded by corporations or government agencies for their workers
and administered primarily by the trust departments of commercial banks or by life
insurance companies
Question 3
Alternative Minimum Tax
Correct Answer
Created by Congress to make it more difficult for wealthy individuals to avoid
paying taxes through the use of various deductions.
Question 4
Fixed Assets Turnover Ratio
Correct Answer
The ratio of sales to net fixed assets.
- measures how effectively the firm uses its plant and equipment
- ISSUE: they are shown on balance sheet as their historical costs less depreciation
so inflation may cause them to be understated
Page 1 of 29
,Question 5
Business Ethics
Correct Answer
thought of as the company's attitude and conduct toward its employees, customers,
community, and stockholders
Question 6
If a stock's actual price is greater than its intrinsic price then the stock is ___
Correct Answer
overvalued
Question 7
Stock's Intrinsic Value Depends on
Correct Answer
"true" investor cash flows + "true" risk
- where "true" means the cash flows and risk that investors would expect if they had
all the information that existed about a company
Question 8
What level of management causes the most problems?
Correct Answer
typically middle-level managers who are trying to boost their unit's profits and thus
their bonuses
Question 9
Market Price
Correct Answer
stock value based on perceived but possibly incorrect information as seen my the
marginal investor
Page 2 of 29
, Question 10
S Corporations
Correct Answer
A special designation that allows small businesses that meet qualifications to be
taxed as if they were a proprietorship or a partnership rather than a corporation.
- must have no more than 100 stockholders
Question 11
DuPont Equation
Correct Answer
ROE = Net Profit Margin x Asset Turnover x Equity Multiplier
Or...
Net Income / Equity
Question 12
Financial Management (Corporate Finance)
Correct Answer
focuses on decisions relating to how much and what type of assets to acquire, how
to raise the capital needed to purchase assets, and how to run the firm as to
maximize its value; same rules apply to both for-profit and not-for-profit
Question 13
Financial Intermediary
Correct Answer
when transfers are made through institutions such as banks, insurance companies,
or mutual funds
- they obtain funds from savers in exchange for its securities and uses these funds
to buy and hold business' securities
- they create new forms of capital, like CoD
Page 3 of 29
