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Final Practice for the course
Goal of firm Answer: d MEDIUM i. The primary operating goal of a publicly-owned firm interested in serving its
stockholders should be to
a. Maximize its expected total corporate income.
b. Maximize its expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share over the long run, which is the stock’s
intrinsic value.
e. Maximize the stock price on a specific target date.
Firm organization Answer: c EASY ii. Which of the following statements is CORRECT?
a. One of the advantages of the corporate form of organization is that it avoids
double taxation.
b. It is easier to transfer one’s ownership interest in a partnership than in a
corporation.
c. One of the disadvantages of a sole proprietorship is that the proprietor is
exposed to unlimited liability.
d. One of the advantages of a corporation from a social standpoint is that every
stockholder has equal voting rights, i.e., “one person, one vote.”
e. Corporations of all types are subject to the corporate income tax.
Dividends, retained earnings Answer: b EASY/MEDIUM iii. Fine Breads Inc. paid out $26,000 common dividends during 2005, and it ended the year with $150,000 of retained earnings. The prior year’s retained earnings were
$145,000. What was the firm's 2005 net income?
a. $30,000
b. $31,000
c. $32,000
d. $33,000
e. $34,000
Statement of cash flows Answer: d MEDIUM iv. Which of the following statements is CORRECT?
a. In the statement of cash flows, depreciation charges are reported as a use of
cash.
b. In the statement of cash flows, a decrease in accounts receivable is reported as a
use of cash.
c. In the statement of cash flows, a decrease in inventories is reported as a use of
cash.
d. In the statement of cash flows, a decrease in accounts payable is reported as a
use of cash.
e. Dividends do not show up in the statement of cash flows because dividends are
considered to be a financing activity, not an operating activity.
Effect of reducing costs on ROE Answer: a MEDIUM v. Last year, Candle Corp had $200,000 of assets, $300,000 of sales, $20,000 of net income, and a debt-to-total-assets ratio of 40%. The new CFO believes a new
computer program will enable it to reduce costs and thus raise net income to $30,000.
Assets, sales, and the debt ratio would not be affected. By how much would the cost
reduction improve the ROE?
a. 8.33%
b. 8.67%
c. 9.00%
d. 9.33%
e. 9.67%
Du Pont equation: basic calculation Answer: b EASY vi. Midwest Lumber had a profit margin of 5.1%, a total assets turnover of 1.6, and an equity multiplier of 1.8. What was the firm's ROE?
a. 14.39%
b. 14.69%
c. 14.99%
d. 15.29%
e. 15.59%
Current ratio Answer: e EASY vii. A firm wants to strengthen its financial position. Which of the following actions would INCREASE its current ratio?
a. Borrow using short-term debt and use the proceeds to repay debt that has a
maturity of more than one year.
b. Reduce the company’s days’ sales outstanding ratio to the industry average and
use the resulting cash savings to purchase plant and equipment.
c. Use cash to increase inventory holdings.
d. Use cash to repurchase some of the company’s own stock.
e. Issue new stock and use some of the proceeds to purchase additional inventory
and hold the remainder of the funds received as cash.
Estimating the 1-year forward rate Answer: e MEDIUM viii. Suppose the interest rate on a 1-year T-bond is 5.0% and that on a 2-year T-bond is
6.0%. Assuming the pure expectations theory is correct, what is the market's
forecast for 1-year rates 1 year from now?
a. 6.65%
b. 6.74%
c. 6.83%
d. 6.92%
e. 7.01%
Default risk premium Answer: b EASY
