1 Business Finance 620 CH01-02-03-17 Practice Problems ____ 1. What is the marginal impact on income taxes for a profitable company in the 35% tax bracket that incurs an additional dollar of depreciation expense? A. A decrease of 35 cents B. A decrease of 65 cents C. An increase of 65 cents D. A change in depreciation expense will not affect income taxes. ____ 2. A firm with a $350,000 annual depreciation charge has a times interest earned ratio of 7.0. This indicates the firm: A. has a relatively low tax liability. B. pays seven times its EBIT in interest expense. C. earns significantly more than its debt service. D. has $7 of cash for each dollar of interest expense. ____ 3. Which of the following statements is correct for a firm whose plowback ratio last year was 40%, whose EPS was $2.75, and whose marginal income tax bracket was 35%? A. DPS increased by 40%. B. Taxable income was negative. C. Book value per share decreased by $1.10. D. DPS was $1.65. ____ 4. Which of the following actions would be most detrimental to a company?s current ratio if that ratio currently stands at 2.0? A. Buy raw materials on credit. B. Sell marketable securities at cost. C. Use cash to reduce accounts payable. D. Use cash to pay down long-term debt. ____ 5. Under the limited partnership form of organization, A. limited partners have basically the same liability as sole proprietors. B. limited partners have limited tax liability. C. only the general partner can own shares of stock issued by the partnership. D. limited partners have limited liability for actions of the partnership. ____ 6. All the following statements concerning the relation between book value and market value are correct EXCEPT: A. Market value will always be greater than book value. B. Management should always use market value when making financial decisions for the firm. C. Unlike book value, market value can be difficult to determine. D. Book value can exceed market value. Business Finance 620 CH01-02-03-17 Practice Problems 2 ____ 7. All the following statements concerning business organization are correct EXCEPT: A. General partners have unlimited personal liability for business debts in a limited partnership. B. The separation of ownership and management is a distinguishing characteristic of corporations. C. The liability of sole proprietors is limited to the amount of their investment in the company. D. A limited liability company combines key tax and liability benefits of partnerships and corporations. ____ 8. What is the marginal tax rate for a corporation with $60,000 of taxable income and an average tax rate of 16.67%, if the next-lowest marginal tax rate of 15% covers taxable incomes up to $50,000? A. 15.00% B. 16.67% C. 18.34% D. 25.00% ____ 9. A firm?s quick ratio is 0.34. This indicates the firm: A. has insufficient EBIT to cover interest expense. B. has been overstating the value of its inventory. C. faces a potentially serious liquidity problem if management cannot borrow short-term. D. has too much invested short-term and should start liquidating marketable securities to generate cash. ____ 10. Which of the following statements concerning the corporate form of organization is correct? A. A corporation that operates in only a single state is said to be ?closely held.? B. Once a business has been incorporated, its shares can be sold to the public. C. Shareholders of a public company that pays a regular cash dividend are subject to double taxation. D. In the wake of Sarbannes-Oxley, a company?s CEO and CFO may not serve on the company?s board of directors. ____ 11. Which of the following statements provides the most plausible explanation for a company whose statement of cash flows exhibits an increase in the ending cash balance, at the same time cash flows from both operations and financing are negative? A. The firm has relatively low depreciation expense. B. The firm did not pay any cash dividends during the year. C. The firm sold more equipment than it purchased during the year. D. The interest rate on the firm?s long-term debt is relatively low. Business Finance 620 CH01-02-03-17 Practice Problems 3 ____ 12. A small biotech firm has: ? a times interest earned ratio of 4.50 ? a tax liability of $1.375 million ? interest expense of $1.650 million, and ? average equity over the last year of $12.035 million. What is the firm?s ROE? A. 19.7% B. 36.6% C. 42.5% D. 61.7% ____ 13. You have the following information for AMT Products: 13,00016,000Notes payable 270,000285,000Net fixed assets 30,00036,000Depreciation expense 50,000 63,700 578,000 42,200 11,200 26,300 $ 49,000 2004 82,000Inventories 70,000Taxable income 600,000Revenue 34,100Accounts receivable 10,000Interest expense 27,100Income taxes paid $ 57,000Accounts payable 2005 What is the firm?s 2005 cash flow from operations (operating cash flow)? A. $63,500 B. $70,000 C. $57,000 D. $42,900 ____ 14. A firm?s current ratio is 0.89. Which of the following actions would reduce the ratio?s value? A. Use cash to pay accounts payable. B. Sell marketable securities for cash. C. Use bond proceeds to pay stock dividends. D. Buy additional inventory on short-term credit. ____ 15. All the following statements concerning financial markets are correct EXCEPT: A. Capital markets include markets for long-term debt securities. B. IPO shares are not sold through secondary markets. C. Financial intermediaries invest in financial assets rather than real assets. D. Primary markets include only the equity securities of large corporations. Business Finance 620 CH01-02-03-17 Practice Problems 4 ____ 16. What must happen to asset turnover to leave ROE unchanged from its original level of 16% if the profit margin is reduced from 8% to 6% and the leverage ratio increases from 1.2 to 1.6? A. Asset turnover must remain constant. B. Asset turnover must increase from 1.46 to 2.33. C. Asset turnover must decrease from 14.58 to 2.33. D. Asset turnover must increase from 4.76 to 9.60. ____ 17. Which of the following actions represents a source of cash to the firm? A. Increase in accounts payable B. Increase in inventories C. Repurchase of common stock D. Increase in accounts receivable ____ 18. Last year, Global Technology Corporation?s ROE was 30%. This year, with net income unchanged from last year, the firm?s ROE fell to 20%. The firm has no preferred stock. Which of the following statements would explain this drop in ROE? A. Equity decreased by 10%. B. Equity decreased by 50%. C. Equity increased by 10%. D. Equity increased by 50%. ____ 19. A share of Pfizer stock is purchased by an individual for $75 and later sold to another investor for $117. Who profits from the $117 sale? A. The profit is split equally between Pfizer and the first investor. B. Only Pfizer profits. C. Only the first investor profits. D. Only the second investor profits. ____ 20. All the following statements concerning corporate financial reporting are correct EXCEPT: A. The difference between the market values of assets and liabilities is the market value of shareholder equity. B. Fixed assets can be either tangible or intangible. C. An increase in accounts receivable produces a decrease in a firm?s cash flow. D. Because intangible assets are difficult to value, firms usually exclude them from the balance sheet. Bill ExamView Pro - BFIN 620 CH01-02-03-17 Practice Problems NEW.tst
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