Finance 101 - Exam 2

  1. Capital structure
    • How should we pay for our assets?
    • Should we use debt or equity?
    • Mixture of debt and equity for a firm.
  2. The division of profits and losses among the members of a partnership is formalized in the:

    E. partnership agreement
  3. Agency costs refer to:

    E. the costs of any conflicts of interest between stockholders and management.
  4. 3. Working capital management includes decisions concerning which of the following?

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

    B. I, II, and IV only
  5. Working capital management:

    E. is concerned with managing day to day cash flow.
  6. Which one of the following best describes the primary advantage of being a limited partner rather than a general partner?

    B. Liability for firm debts limited to the capital invested
  7. A general partner:

    A. has more management responsibility than a limited partner.
  8. A partnership:

    A. terminates at the death of any general partner.
  9. 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

    C. I, II, and IV only
  10. 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
    E. I, III, and IV only
  11. Which one of the following statements is correct?

    C. Both sole proprietorships and partnerships are taxed in a similar fashion
  12. 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. 
    being taxed personally on all business income.
  13. Which type of business organization has all the respective rights and privileges of a legal person?

    B. Corporation
  14. 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
  15. 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

    C. I, II and III only
  16. A proxy fight occurs when

    A. a group solicits proxies to replace the board of directors
  17. 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
    I and III only
  18. Insider trading is:

    D. illegal.
  19. The Securities Exchange Act of 1934 focuses on:

    C. insider trading.
  20. The basic regulatory framework in the United States was provided by:

    D. A and C.
  21. Accounting profits and cash flows are:

    A. generally not the same since GAAP allows for revenue recognition separate from the receipt of cash flows.
  22. 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? 

    • B. $1,400
    • Book value of shareholders' equity = $2,000 + $300 - $900 = $1,400
  23. 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
    • Taxable income = $640,000 - $480,000 - $40,000 - $60,000 = $60,000; Tax = .34($60,000) = $20,400; Net income = $60,000 - $20,400 = $39,600
  24. Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $126,500?                            

    • E. 25.76%
    • Tax = .15($50,000) + .25($25,000) + .34($25,000) +.39($126,500 - $100,000) = $32,585; Average tax rate = $32,585 ¸ $126,500 = .2576 = 25.76 percent
  25. 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?                            

    B. $6,710C
  26. 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? 

    E. $180
  27. 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? 

    D. $20
  28. 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? 

    C. $64
Card Set
Finance 101 - Exam 2
Chapters 1-3