FIN 534 Review Test Submission: Week 5 Midterm Exam Part 1

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Status
Completed
Attempt 48 out of 50 points
Score
Instructio
ns
This exam consist of 25 multiple choice questions and covers the
material in Chapters 1 through 3.
false

Question 1
2 out of 2 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:
Correct
Answer:

Capital market instruments include both long-term debt

and common stocks.
Capital market instruments include both long-term debt
and common stocks.

Question 2
2 out of 2 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

One advantage of forming a corporation is that equity

investors are usually exposed to less liability than in a
regular partnership.
One advantage of forming a corporation is that equity
investors are usually exposed to less liability than in a
regular partnership.

Question 3
2 out of 2 points

Which of the following statements is CORRECT?

Answer
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 4
2 out of 2 points

Money markets are markets for

Answer
Selected Answer:
Short-term debt securities.
Correct Answer:
Short-term debt securities.

Question 5
2 out of 2 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

Sole proprietorships and partnerships generally have a

tax advantage over many corporations, especially large
ones.
Sole proprietorships and partnerships generally have a
tax advantage over many corporations, especially large
ones.

Question 6
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?
Answer
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 7
2 out of 2 points

You recently sold 100 shares of your new company, XYZ Corporation,
to your brother at a family reunion. At the reunion your brother gave
you a check for the stock and you gave your brother the stock
certificates. Which of the following statements best describes this
transaction?
Answer
Selected Answer:
This is an example of a direct transfer of capital.
Correct Answer:
This is an example of a direct transfer of capital.

Question 8
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:
Answer
Selected Answer:
A secondary market transaction.
Correct Answer:
A secondary market transaction.

Question 9
2 out of 2 points

DeYoung Devices Inc., a new high-tech instrumentation firm, is

building and equipping a new manufacturing facility. Assume that
currently its equipment must be depreciated on a straight-line basis
over 10 years, but Congress is considering legislation that would
require the firm to depreciate the equipment over 7 years. If the
legislation becomes law, which of the following would occur in the year
following the change?
Answer
Selected Answer:
The firm's net cash flow would increase.
Correct Answer:
The firm's net cash flow would increase.

Question 10
2 out of 2 points

Which of the following items is NOT included in current assets?

Answer
Selected Answer:
Bonds.
Correct Answer:
Bonds.

Question 11
2 out of 2 points

Lucy's Music Emporium opened its doors on January 1, 2012, and it

was granted permission to use the same depreciation calculations for
shareholder reporting and income tax purposes. The company planned
to depreciate its fixed assets over 20 years, but in December 2012
management realized that the assets would last for only 15 years. The
firm's accountants plan to report the 2012 financial statements based
on this new information. How would the new depreciation assumption
affect the company's financial statements?
Answer
Selected
Answer:

The firm's cash position in 2012 and 2013 would

increase.

Correct Answer:
The firm's cash position in 2012 and 2013 would
increase.

Question 12
2 out of 2 points

Which of the following statements is CORRECT?

Answer
Selected
Answer:

Correct
Answer:

A typical industrial company's balance sheet lists the firm's

assets that will be converted to cash first, and then goes
on down to list the firm's longest lived assets last.
A typical industrial company's balance sheet lists the firm's
assets that will be converted to cash first, and then goes
on down to list the firm's longest lived assets last.

Question 13
2 out of 2 points

Which of the following statements is CORRECT?

Answer
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 14
2 out of 2 points

The LeMond Corporation just purchased a new production line. Assume

that the firm planned to depreciate the equipment over 5 years on a
straight-line basis, but Congress then passed a provision that requires
the company to depreciate the equipment on a straight-line basis over
7 years. Other things held constant, which of the following will occur
as a result of this Congressional action? Assume that the company
uses the same depreciation method for tax and stockholder reporting
purposes.

Answer
Selected
Answer:
Correct
Answer:

LeMond's net fixed assets as shown on the balance

sheet will be higher at the end of the year.
LeMond's net fixed assets as shown on the balance
sheet will be higher at the end of the year.

Question 15
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?
Answer
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 16
0 out of 2 points

Which of the following statements is CORRECT?

Answer
Selecte
d
Corporations obtain capital for use in their operations by
Answer: borrowing and by raising equity capital, either by selling new
common stock or by retaining earnings. The cost of debt
capital is the interest paid on the debt, and the cost of the
equity is the dividends paid on the stock. Both of these costs
are deductible from income when calculating income for tax
purposes.
Correct
Answer: Interest paid to an individual is counted as income for tax
purposes and taxed at the individual's regular tax rate,
which in 2010 could go up to 35%, but dividends received
were taxed at a maximum rate of 15%.

Question 17
2 out of 2 points

Other things held constant, which of the following actions would

increase the amount of cash on a company's balance sheet?
Answer
Selected Answer:
The company issues new common stock.
Correct Answer:
The company issues new common stock.

Question 18
2 out of 2 points

The Cavendish Company recently issued new common stock and used
the proceeds to pay off some of its short-term notes payable. This
action had no effect on the company's total assets or operating
income. Which of the following effects would occur as a result of this
action?
Answer
Selected Answer:
The company's current ratio increased.
Correct Answer:
The company's current ratio increased.

Question 19
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.
Answer
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.

Question 20
2 out of 2 points

If a bank loan officer were considering a company's request for a loan,

which of the following statements would you consider to be CORRECT?
Answer
Selected
Answer:
Correct
Answer:

Other things held constant, the lower the debt ratio, the
lower the interest rate the bank would charge the firm.
Other things held constant, the lower the debt ratio, the
lower the interest rate the bank would charge the firm.

Question 21
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?
Answer
Selected Answer:
Increase EBIT while holding sales constant.
Correct Answer:
Increase EBIT while holding sales constant.

Question 22
2 out of 2 points

A firm wants to strengthen its financial position. Which of the following

actions would increase its current ratio?
Answer
Selected
Answer:

Correct
Answer:

Issue new stock and then use some of the proceeds to

purchase additional inventory and hold the remainder as
cash.
Issue new stock and then use some of the proceeds to
purchase additional inventory and hold the remainder as
cash.

Question 23
2 out of 2 points

Companies A and C each reported the same earnings per share (EPS),
but Company A's stock trades at a higher price. Which of the following
statements is CORRECT?
Answer
Selected Answer:
Company A trades at a higher P/E ratio.
Correct Answer:
Company A trades at a higher P/E ratio.

Question 24
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?
Answer
Selected Answer:
The tax bill will increase.
Correct Answer:
The tax bill will increase.

Question 25
2 out of 2 points

Which of the following statements is CORRECT?

Answer
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).