Financial Theory & Practice Exam 1 Questions
with Answers (100% Correct Answers)
The primary goal of a publicly owned firm should be to __________ .
minimize the chances of losses
maximize the stock price on a specific target date
maximize the firm's expected total income
maximize the stock price per share over the long run
maximize the firm's expected EPS Answer: —maximize the stock price per
share over the long run
Debt is less risky than equity because a debtholder's claim has priority to an
equity holder's claim.
True
False Answer: —True
Last year, the Husky Corporation's cash balance increased, even though it had
a negative cash flow from operations. What could explain that?
- Husky Corporation paid a large dividend.
- Husky Corporation made a large cash investment in new equipment.
- Husky Corporation repurchased 20% of its common stock.
- Husky Corporation had high depreciation expenses on computer technology.
- Husky Corporation sold a new issue of bonds. Answer: —Husky Corporation
sold a new issue of bonds.
,2
Which of the following items is not included in current assets?
Accounts Receivable
Inventory
Cash
Short-term Investments
Bonds Answer: —Bonds
You observe that a firm's ROE is above the industry average, but its Net Profit
Margin and Debt Ratio are both below the industry average. Which of the
following statements is correct?
- Its Total Assets Turnover must be below the industry average.
- Its Return on Assets must equal the industry average.
- Its Current Ratio must equal the industry average.
- Its TIE ratio must be below the industry average.
- Its Total Assets Turnover must be above the industry average. Answer: —Its
Total Assets Turnover must be above the industry average.
A common size balance sheet shows each item as a percentage of __________ .
Free Cash Flow
Sales
Total Equity
EBIT
Total Assets Answer: —Total Assets
, 3
A decline in a firm's Inventory Turnover Ratio suggests that it is managing its
inventory more efficiently and that its liquidity position is improving.
True
False Answer: —False
Which of the following would, generally, indicate an improvement in a
company's financial position, holding other things constant?
A decrease in the Total Assets Turnover
A decrease in the Interest Coverage Ratio
An increase in the Interest Coverage Ratio
An increase in the Days Sales Outstanding
A decrease in the Current and Quick Ratios Answer: —An increase in the
Interest Coverage Ratio
Business Scenario:
Ian started a business, based in a different state, with his uncle. Due to the
business's underperformance, they had to close the business. Ian, however,
ended up losing his house due to a litigation claim.
What is the type of business? Answer: —Partnership
Business Scenario:
Ean, the CEO of a beverage company, is required to certify the accuracy of
information provided in the company's quarterly reports.
What is the type of business? Answer: —Corporation
Business Scenario:
with Answers (100% Correct Answers)
The primary goal of a publicly owned firm should be to __________ .
minimize the chances of losses
maximize the stock price on a specific target date
maximize the firm's expected total income
maximize the stock price per share over the long run
maximize the firm's expected EPS Answer: —maximize the stock price per
share over the long run
Debt is less risky than equity because a debtholder's claim has priority to an
equity holder's claim.
True
False Answer: —True
Last year, the Husky Corporation's cash balance increased, even though it had
a negative cash flow from operations. What could explain that?
- Husky Corporation paid a large dividend.
- Husky Corporation made a large cash investment in new equipment.
- Husky Corporation repurchased 20% of its common stock.
- Husky Corporation had high depreciation expenses on computer technology.
- Husky Corporation sold a new issue of bonds. Answer: —Husky Corporation
sold a new issue of bonds.
,2
Which of the following items is not included in current assets?
Accounts Receivable
Inventory
Cash
Short-term Investments
Bonds Answer: —Bonds
You observe that a firm's ROE is above the industry average, but its Net Profit
Margin and Debt Ratio are both below the industry average. Which of the
following statements is correct?
- Its Total Assets Turnover must be below the industry average.
- Its Return on Assets must equal the industry average.
- Its Current Ratio must equal the industry average.
- Its TIE ratio must be below the industry average.
- Its Total Assets Turnover must be above the industry average. Answer: —Its
Total Assets Turnover must be above the industry average.
A common size balance sheet shows each item as a percentage of __________ .
Free Cash Flow
Sales
Total Equity
EBIT
Total Assets Answer: —Total Assets
, 3
A decline in a firm's Inventory Turnover Ratio suggests that it is managing its
inventory more efficiently and that its liquidity position is improving.
True
False Answer: —False
Which of the following would, generally, indicate an improvement in a
company's financial position, holding other things constant?
A decrease in the Total Assets Turnover
A decrease in the Interest Coverage Ratio
An increase in the Interest Coverage Ratio
An increase in the Days Sales Outstanding
A decrease in the Current and Quick Ratios Answer: —An increase in the
Interest Coverage Ratio
Business Scenario:
Ian started a business, based in a different state, with his uncle. Due to the
business's underperformance, they had to close the business. Ian, however,
ended up losing his house due to a litigation claim.
What is the type of business? Answer: —Partnership
Business Scenario:
Ean, the CEO of a beverage company, is required to certify the accuracy of
information provided in the company's quarterly reports.
What is the type of business? Answer: —Corporation
Business Scenario:
