MIDTERM Exam Multiple Questions Finance

MULTIPLE CHOICE
1. The biggest disadvantage of the sole proprietorship is _________________. A. Total control
B. Double taxation C. Unlimited liability D. Limited access to capital
2. All of the following are advantages to organizing as a corporation except ____. A. Limited liability B. Double taxation C. Easy access to capital D. Easy to transfer ownership
3. From the perspective of access to capital, the best form of business organization is the _______. A. Corporation B. Partnership C. S Corporation
D. Sole proprietorship
4. From the perspective of ownership risk, the best form of business organization is the ______. A. Partnership B. Corporation C. S Corporation
D. Sole proprietorship
5. From the perspective of control, the best form of business organization is the __________. A. Partnership B. Corporation C. S Corporation
D. Sole proprietorship
6. The overall goal of the financial manager is to _________________. A. Minimize total costs B. Maximize net income C. Maximize earnings per share D. Maximize shareholder wealth
7. All of the following are an example of a fiduciary relationship except: A. a CEO manages the firm B. a bank employee manages deposits C. a financial advisor advises her clients D. the shareholder elects a board member
8. Which of the following statements is correct? A. Accountants are focused on what happened in the past. B. Financial managers are focused on what happened in the past. C. Financial managers double-check the accountant’s statements.
D. Both accountants and financial managers use total quality management systems to standardize data.
9. Maximizing owners’ equity value means carefully considering all of the following except _______. A. Which projects to invest in B. How best to increase the firm’s risk C. How to best bring additional funds into the firm
D. How best to return the profits from those projects to the owners over time
10. The most common type of business in the United States is the __________. A. Corporation B. Partnership C. Sole Proprietorship D. Hybrid organization such as a limited liability company
11. Attempting to maximizing shareholder value can lead to A. less pollution worldwide. B. minimizing bondholders’ wealth.
C. disasters, like the BP oil spill in the Gulf. D. a long-term outlook by a firm’s managers.
12. Which of the following statements is correct? A. Shareholder wealth maximization is achieved by minimizing costs or maximizing net profit. B. Shareholder wealth maximization may actually be beneficial for society in the long-run. C. Shareholder wealth maximization is achieved by maximizing market share. D. All of these statements are correct.
13. Unethical behavior by an organization may be from all of the following except; A. Agency costs between stockholders and the public B. poor personal ethics C. a low risk of getting caught D. A focus on long-term success.
14. An employee stock option plan is ________________. A. A plan that only partnerships can use to defer compensation to partners B. A perk usually only given to the board of directors as compensation C. A way to align the interests of employees with those of the owners D. None of these answers are correct
15. A legal duty between two parties where one party must act in the interest of the other party is known as a(n) ______________. A. Fiduciary B. Venture capitalist C. Restricted investor
D. Restricted capitalist
16. Restricted stock is: A. a special type of stock that is not transferable from the current holder to others until specific conditions are satisfied. B. a special type of stock that can be converted into corporate bonds after a specific amount of time has elapsed. C. a special type of stock that is a result of offering an employee stock ownership plan. D. None of these answers is correct.
17. All of the following are functions of the board of directors except ________. A. Hire the CEO B. Evaluate the CEO C. Provide reports to the auditors
D. Design compensation contracts for the CEO
18. The agency relationship in corporate finance refers to _______________________. A. when the corporate hires an advertising agency to market their new product/service B. when the shareholders hire a manager to run their company C. when the board of directors are elected to staggered terms D. when the board of directors oversee the CEO
19. The role of a credit analyst is to ______________. A. help firms access capital markets B. examine a firm’s financial strength for its debt holders C. monitor the business activities and report to the Securities Exchange Commission
D. follow a firm and conduct their own evaluations of the company’s business activities
20. All of the following are cash flows from financing activities except a(n) _________. A. Increase in accounts payable B. Stock Repurchases C. Paying dividends
D. Issuing stock
21. Cash flows available to pay the firm’s stockholders and debt holders after the firm has made the necessary working capital investments, fixed asset investments, and developed the necessary new products to sustain the firm’s ongoing operations is referred to as _________________. A. Net operating working capital B. Operating cash flow C. Free cash flow D. None of the above
22. All of the following are reasons that one should be cautious in interpreting financial statements except ____________. A. Firms can take steps to over- or understate earnings at various times. B. It is difficult to compare two firms that use different depreciation methods. C. Financial managers have quite a bit of latitude in using accounting rules to manage their reported earnings.
D. All of the above are reasons to be cautious in interpreting financial statements.
23. All of the following are cash flows from investing activities except a(n)___________. A. Increases in fixed assets B. Decreases in fixed assets C. Increases in marketable securities D. All of these items are cash flows from investing.
24. Which of the following is incorrect with respect to the Sarbanes-Oxley Act? A. The act requires public and private firms to ensure that their boards’ audit committees have considerable experience in applying generally accepted accounting principles for financial statements. B. The act requires that the firm’s senior management sign off on the financial statements certifying the statements as accurate and representative of the firm’s financial condition. C. This act was passed as result of extreme earnings management. D. All of these statements are correct.
25. A firm currently uses straight-line depreciation but is considering changing to MACRS. If the firm implements the change, which of the following will occur as a result of this change? A. The firm’s taxable income will increase. B. The firm will pay more in taxes. C. The firm’s EBIT will increase. D. None of the above.
26. The following are reasons that firms report ‘accounting’ income, except: A. accounting income is less erratic than cash flow B. Accounting income is a proxy for economic income. C. Accounting income reduces taxes that must be paid.
D. accounting income assumes the firm is a ‘going concern’.
27. The board of directors _____________. A. are hired by the CEO B. are elected by shareholders C. have unlimited liability since they oversee the day-to-day operations of the firm D. are employed by the Securities Exchange Commission to ensure its rules and regulations have been met
28. Which of the following is not a reason to report accounting profit in addition to cash flow? A. Accounting profit has less dramatic swings
B. Accounting profit reflects the idea of a ‘going concern
C. Accounting profit is a better proxy for economic profit D. Accounting profit takes into account the time value of money E. Accounting profit requires firm’s to record transactions with no cash flow
29. Is it possible for a firm to have positive net income and yet it has cash flow problems? A. Yes, this can occur when a firm is growing very rapidly. B. No, this is impossible since net income increases the firm’s cash. C. No, this is impossible since net income and cash are highly correlated.
D. Yes, this is possible if the firm window-dressed its financial statements.
30. Choose the phrase that makes this statement true: Ratio analysis A. can provide useful information on a firm’s past but not current position. B. can provide useful information on a firm’s current position and hint at future performance. C. can provide useful information on a firm’s current position but should never be used to forecast future performance. D. can provide useful information on a firm’s past and current position, but should never be used to forecast future performance.
31. Which of the following is not true about ratio analysis? A. Ratio analysis tells us what we need to do to make the firm better. B. Ratio analysis may be done across firms or through time. C. Ratio analysis may require us to consider interrelationships between ratios. D. Ratio analysis can be used to compare small and large firms.
32. Which of the following statements is correct? A. In general, a firm should strive for a high average payment period because it wants to pay for its purchases as quickly as possible. B. If a firm has a very high fixed asset turnover, it means that the firm may be nearing its maximum production capacity. C. An extremely low average collection period will maximize net income. D. All of the statements above are correct.
33. Common-size financial statements: A. Are obtained by dividing all income statement accounts by net sales and all balance sheet accounts by total assets. B. Allow for an easy comparison of balance sheets and income statements across firms in the industry. C. Provide quantitative clues about the direction that the firm is moving. D. All of the above.
34. The main two sources of the time value of money are:
A. Interest Rates and Risk, B. Inflation and Interest Rates, C. Risk and timing of Consumption.
D. Inflation and timing of…