Finance 101 - Exam 2

Capital structure

The division of profits and losses among the members of a partnership is formalized in the:
A. indemnity clause.
B. statement of purpose.
C. indenture contract.
D. group charter.
E. partnership agreement.

Agency costs refer to:
A. the total dividends paid to stockholders over the lifetime of a firm.
B. the costs that result from default and bankruptcy of a firm.
C. corporate income subject to double taxation.
D. the total interest paid to creditors over the lifetime of the firm.
E. the costs of any conflicts of interest between stockholders and management.

3. Working capital management includes decisions concerning which of the following?

I. accounts payable
II. accounts receivable
III. long-term debt
IV. inventory

A. I and III only
B. I, II, and IV only
C. I and II only
D. I, III, and IV only
E.  II and IV only

Working capital management:
A. ensures that long-term debt is acquired at the lowest possible cost.
B. ensures that dividends are paid to all stockholders on an annual basis.
C. ensures that sufficient equipment is available to produce the amount of product desired on a daily basis.
D. balances the amount of company debt to the amount of available equity.
E. is concerned with managing day to day cash flow.

Which one of the following best describes the primary advantage of being a limited partner rather than a general partner?

A. Greater management responsibility
B. Liability for firm debts limited to the capital invested
C. Entitlement to a larger portion of the partnership's income
D. Ability to manage the day-to-day affairs of the business
E. No potential financial loss

A general partner:
A. has more management responsibility than a limited partner.
B. cannot lose more than the amount of his/her equity investment.
C. has less legal liability than a limited partner.
D. faces double taxation whereas a limited partner does not.
E. is the term applied only to corporations which invest in partnerships.

A partnership:
A. terminates at the death of any general partner.
B. allows for easy transfer of interest from one general partner to another.
C. has less of an ability to raise capital than a proprietorship.
D. agreement defines whether the business income will be taxed like a partnership or a corporation.
E. is taxed the same as a corporation.

Which of the following are disadvantages of a partnership?
I. limited life of the firm
II. personal liability for firm debt
III. greater ability to raise capital than a sole proprietorship
IV. lack of ability to transfer partnership interest
A. II and III only
B. III and IV only
C. I, II, and IV only
D. I and II only
E. I, III, and IV only

Which of the following are advantages of the corporate form of business ownership?
I. limited liability for firm debt
II. double taxation
III. ability to raise capital
IV. unlimited firm life
A. I and II only
B. III and IV only
C. I, II, and III only
D. II, III, and IV only
E. I, III, and IV only

Which one of the following statements is correct?
A. All types of business formations have limited lives.
B. Partnerships are the most complicated type of business to form.
C. Both sole proprietorships and partnerships are taxed in a similar fashion.
D. Both partnerships and corporations have limited liability for general partners and shareholders.
E. Both partnerships and corporations incur double taxation.

The owners of a limited liability company prefer:
A. being taxed like a corporation.
B. having liability exposure similar to that of a sole proprietor.
C. being taxed personally on all business income.
D. having liability exposure similar to that of a general partner.
E. being taxed like a corporation with liability like a partnership. 

Which type of business organization has all the respective rights and privileges of a legal person?
A. General partnership
B. Corporation
C. Limited liability company
D. Sole proprietorship
E. Limited partnership

13. Which one of the following actions by a financial manager creates an agency problem?
A. Agreeing to expand the company at the expense of stockholders' value
B. Agreeing to pay bonuses based on the book value of the company stock
C. Refusing to lower selling prices if doing so will reduce the net profits
D. Refusing to borrow money when doing so will create losses for the firm
E. Increasing current costs in order to increase the market value of the stockholders' equity

Which of the following help convince managers to work in the best interest of the stockholders?
I. compensation based on the value of the stock
II. stock option plans
III. threat of a proxy fight
IV. threat of conversion to a partnership

A. I and II only
B. I and III only
C. I, II and III only
D. II and III only
E. I, II, III, and IV

A proxy fight occurs when
A. a group solicits proxies to replace the board of directors
B. a competitor offers to sell their ownership in the firm
C. the board solicits renewal of current members
D. the firm files for bankruptcy
E. the firm is declared insolvent

Which of the following are key requirements of the Sarbanes-Oxley Act?
I. Officers of the corporation must review and sign annual reports.
II. Officers of the corporation must now own more than 5% of the firm's stock
III. Annual reports must list deficiencies in internal controls.
IV. Annual reports must be filed with the SEC within 30 days of year end.
A. I only
B. II only
C. I and III only
D. II and III only
E. II and IV only

Insider trading is:
A. list only the securities of the largest firms.
B. legal.
C. discouraged, but legal.
D. illegal.
E. impossible to have in our efficient market

The Securities Exchange Act of 1934 focuses on:
A. issuance of new securities.
B. Federal Deposit Insurance Corporation (FDIC) insurance.
C. insider trading.
D. all stock transactions.
E. sales of existing securities.

The basic regulatory framework in the United States was provided by:
A. the Securities Act of 1933.
B. the monetary system.
C. the Securities Exchange Act of 1934.
D. A and C.E. All of the above.

Accounting profits and cash flows are:
A. generally not the same since GAAP allows for revenue recognition separate from the receipt of cash flows.
B. generally the same since accounting profits reflect when the cash flows are received.
C. generally the same since they reflect current laws and accounting standards.
D. generally not the same because cash inflows occur before revenue recognition.
E. Both c and d.

21. Martha's Enterprises spent $2,400 to purchase equipment three years ago. This equipment is currently valued at $2,000 on today's balance sheet but could actually be sold for $2,000. Net working capital is $300 and long-term debt is $900. Assuming the equipment is the firm's only fixed asset, what is the book value of shareholders' equity? 
A.  The answer cannot be determined from the information provided.
B.  $1,400
C.  $800
D.  $200
E.  $1,200

Art's Boutique has sales of$640,000 and costs of $480,000. Interest expense is $40,000 and depreciation is$60,000. The tax rate is 34%.
What is the net income? 
A.  $39,600
B.  $20,400
C.  $50,400
D.  $79,600
E.  $99,600.

Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $126,500?                            
A.  23.88%
B.  34.64%
C.  21.38%
D.  39.00%
E.  25.76%

The tax rates are as shown. Your firm currently has taxable income of $74,000. How much additional tax will you owe if you increase your taxable income by $20,000?                            
A.  $7,174
B.  $6,710
C.  $7,160
D.  $6,940
E.  $6,460

Teddy's Pillows has beginning net fixed assets of $600 and ending net fixed assets of $730. Assets valued at $400 were sold during the year. Depreciation was $50.
What is the amount of net capital spending? 
A.  $150
B.  $130
C.  $165
D.  $330
E.  $180

At the beginning of the year, long-term debt of a firm is $270 and total debt is $340. At the end of the year, long-term debt is $290 and total debt is $390. The interest paid is $40. What is the amount of the cash flow to creditors? 
A.  -$20
B.  $60
C.  $50
D.  $20
E.  -$50

Peggy Grey's Cookies has net income of $360. The firm pays out 40 percent of the net income to its shareholders as dividends. During the year, the company sold $80 worth of common stock. What is the cash flow to stockholders? 
A.  $144
B.  $224
C.  $64
D.  $136
E.  $296