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Financial Management
Week 5 Midterm Exam Part 1

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Completed
50 out of 50 points

Instructions This exam consist of 25 multiple choice questions and

covers the material in Chapters 1 through 3.

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Question 1
2 out of 2 points
Which of the following statements is CORRECT?

Selected
Answer:
Correct
Answer:

As they are generally defined, money market transactions

involve debt securities with maturities of less than one
year.
As they are generally defined, money market transactions
involve debt securities with maturities of less than one
year.

Question 2

2 out of 2 points

Which of the following statements is CORRECT?

Selected
Answer:
Correct
Answer:

It is usually easier to transfer ownership in a corporation

than it is to transfer ownership in a sole proprietorship.
It is usually easier to transfer ownership in a corporation
than it is to transfer ownership in a sole proprietorship.

Question 3

2 out of 2 points
Which of the following statements is CORRECT?

Selected
Answer:
Correct
Answer:

The NYSE operates as an auction market, whereas the

Nasdaq is a dealer market.
The NYSE operates as an auction market, whereas the
Nasdaq is a dealer market.

Question 4

2 out of 2 points

Which of the following statements is CORRECT?

Selected
Answer:
Correct
Answer:

If expected inflation increases, interest rates are likely

to increase.
If expected inflation increases, interest rates are likely
to increase.

Question 5
2 out of 2 points
Which of the following could explain why a business might choose to
operate as a corporation rather than as a sole proprietorship or a
partnership?

Selected
Answer:
Correct
Answer:

Corporate shareholders escape liability for the firm's debts,

but this factor may be offset by the tax disadvantages of the
corporate form of organization.
Corporate shareholders escape liability for the firm's debts,
but this factor may be offset by the tax disadvantages of the
corporate form of organization.

Question 6

2 out of 2 points

You recently sold 200 shares of Apple stock to your brother. The transfer

was made through a broker, and the trade occurred on the NYSE. This is an
example of:

Selected Answer:
A secondary market transaction.

Correct Answer:
A secondary market transaction.

Question 7

2 out of 2 points

Which of the following statements is CORRECT?

Selected
Answer:
Correct
Answer:

The New York Stock Exchange is an auction market with

a physical location.
The New York Stock Exchange is an auction market with
a physical location.

Question 8
2 out of 2 points
Cheers Inc. operates as a partnership. Now the partners have decided to
convert the business into a regular corporation. Which of the following
statements is CORRECT?

Selected
Answer:
Correct
Answer:

Cheers' shareholders (the ex-partners) will now be

exposed to less liability.
Cheers' shareholders (the ex-partners) will now be
exposed to less liability.

Question 9

2 out of 2 points

For managerial purposes, i.e., making decisions regarding the firm's

operations, the standard financial statements as prepared by accountants
under Generally Accepted Accounting Principles (GAAP) are often modified
and used to create alternative data and metrics that provide a somewhat
different picture of a firm's operations. Related to these modifications,
which of the following statements is CORRECT?

Selecte
The standard statements focus on accounting income for the
d
entire corporation, not cash flows, and the two can be quite
Answer: different during any given accounting period. However, for
valuation purposes we need to discount cash flows, not
accounting income. Moreover, since many firms have a
number of separate divisions, and since division managers
should be compensated on their divisions' performance, not
that of the entire firm, information that focuses on the
divisions is needed. These factors have led to the development
of information that is focused on cash flows and the operations
of individual units.

Correct
Answer: The standard statements focus on accounting income for the

entire corporation, not cash flows, and the two can be quite
different during any given accounting period. However, for
valuation purposes we need to discount cash flows, not
accounting income. Moreover, since many firms have a
number of separate divisions, and since division managers
should be compensated on their divisions' performance, not
that of the entire firm, information that focuses on the
divisions is needed. These factors have led to the development
of information that is focused on cash flows and the operations
of individual units.

Question 10

2 out of 2 points

Which of the following statements is CORRECT?

Selected
Answer:

Free cash flow (FCF) is defined as follows:

FCF = EBIT(1 - T)
+ Depreciation and Amortization
- Capital expenditures required to sustain
operations
- Required changes in net operating working
capital.

Correct Answer:
Free cash flow (FCF) is defined as follows:
FCF = EBIT(1 - T)
+ Depreciation and Amortization
- Capital expenditures required to sustain
operations

- Required changes in net operating working

capital.

Question 11

2 out of 2 points

Which of the following statements is CORRECT?

Selected
Answer:
Correct
Answer:

If a company pays more in dividends than it generates in net

income, its retained earnings as reported on the balance
sheet will decline from the previous year's balance.
If a company pays more in dividends than it generates in net
income, its retained earnings as reported on the balance
sheet will decline from the previous year's balance.

Question 12
2 out of 2 points
Analysts following Armstrong Products recently noted that the company's
operating net cash flow increased over the prior year, yet cash as reported
on the balance sheet decreased. Which of the following factors could
explain this situation?

Selected
Answer:
Correct
Answer:

The company made a large investment in a profitable

new plant.
The company made a large investment in a profitable
new plant.

Question 13

2 out of 2 points

Which of the following statements is CORRECT?

Selected
Answer:
Correct
Answer:

In the statement of cash flows, a decrease in accounts

payable is reported as a use of cash.
In the statement of cash flows, a decrease in accounts
payable is reported as a use of cash.

 Question 14
2 out of 2 points
Which of the following statements is CORRECT?

Selected
Answer:
Correct
Answer:

The income statement for a given year, say 2012, is

designed to give us an idea of how much the firm earned
during that year.
The income statement for a given year, say 2012, is
designed to give us an idea of how much the firm earned
during that year.

Question 15

2 out of 2 points

Which of the following statements is CORRECT?

Selected
Answer: The statement of cash flows shows how much the firm's

cash the total of currency, bank deposits, and short-term

liquid securities (or cash equivalents) increased or
decreased during a given year.

Correct
Answer: The statement of cash flows shows how much the firm's

cash the total of currency, bank deposits, and short-term

liquid securities (or cash equivalents) increased or
decreased during a given year.

Question 16
2 out of 2 points
Which of the following would be most likely to occur in the year after
Congress, in an effort to increase tax revenue, passed legislation that
forced companies to depreciate equipment over longer lives? Assume that
sales, other operating costs, and tax rates are not affected, and assume
that the same depreciation method is used for tax and stockholder
reporting purposes.

Selected Answer:
Companies' cash positions would decline.

Correct Answer:

Companies' cash positions would decline.

Question 17

2 out of 2 points

Which of the following statements is CORRECT?

Selected
Answer: Small businesses that qualify under the Tax Code can elect

not to pay corporate taxes, but then their owners must report
their pro rata shares of the firm's income as personal income
and pay taxes on that income.

Correct
Answer:

Small businesses that qualify under the Tax Code can elect
not to pay corporate taxes, but then their owners must report
their pro rata shares of the firm's income as personal income
and pay taxes on that income.

Question 18
2 out of 2 points
Which of the following statements is CORRECT?

Selected
Answer:
Correct
Answer:

A firm that employs financial leverage will have a higher

equity multiplier than an otherwise identical firm that has no
debt in its capital structure.
A firm that employs financial leverage will have a higher
equity multiplier than an otherwise identical firm that has no
debt in its capital structure.

Question 19

2 out of 2 points

Cordelion Communications is considering issuing new common stock and

using the proceeds to reduce its outstanding debt. The stock issue would
have no effect on total assets, the interest rate Cordelion pays, EBIT, or the
tax rate. Which of the following is likely to occur if the company goes
ahead with the stock issue?

Selected Answer:
The tax bill will increase.

Correct Answer:

The tax bill will increase.

Question 20

2 out of 2 points

A firm's new president wants to strengthen the company's financial

position. Which of the following actions would make it financially stronger?

Selected Answer:
Increase EBIT while holding sales constant.

Correct Answer:
Increase EBIT while holding sales constant.

Question 21
2 out of 2 points
Which of the following would, generally, indicate an improvement in a
company's financial position, holding other things constant?

Selected Answer:
The EBITDA coverage ratio increases.

Correct Answer:
The EBITDA coverage ratio increases.

Question 22

2 out of 2 points

Which of the following statements is CORRECT?

Selected
Answer:
Correct
Answer:

The higher the market/book ratio, then, other things held

constant, the higher one would expect to find the Market
Value Added (MVA).
The higher the market/book ratio, then, other things held
constant, the higher one would expect to find the Market
Value Added (MVA).

Question 23
2 out of 2 points
Which of the following statements is CORRECT?

Selected
Answer: Borrowing on a long-term basis and using the proceeds to

retire short-term debt would improve the current ratio and

thus could be considered to be an example of "window
dressing."

Correct
Answer:

Borrowing on a long-term basis and using the proceeds to

retire short-term debt would improve the current ratio and
thus could be considered to be an example of "window
dressing."

Question 24

2 out of 2 points

Which of the following statements is CORRECT?

Selected
Answer:
Correct
Answer:

If a firm increases its sales and cost of goods sold while

holding its inventories constant, then, other things held
constant, its inventory turnover ratio will increase.
If a firm increases its sales and cost of goods sold while
holding its inventories constant, then, other things held
constant, its inventory turnover ratio will increase.

Question 25
2 out of 2 points
If the CEO of a large, diversified, firm were filling out a fitness report on a
division manager (i.e., "grading" the manager), which of the following
situations would be likely to cause the manager to receive a better grade?
In all cases, assume that other things are held constant.

Selected
Answer:
Correct
Answer:

The division's basic earning power ratio is above the

average of other firms in its industry.
The division's basic earning power ratio is above the
average of other firms in its industry.

Thursday, May 5, 2016 3:52:01 PM EDT

OK