accounts data bank

1. Which of the following statements is CORRECT?

a. One of the disadvantages of incorporating your business is that you could become subject to the firm's liabilities in the event of bankruptcy.

b. Sole proprietorships are subject to more regulations than corporations.

c. In any partnership, every partner has the same rights, privileges, and liability exposure as every other partner.

d. Corporations of all types are subject to the corporate income tax.

e. Sole proprietorships and partnerships generally have a tax advantage over corporations.

2. What is the sequential approach?

a. Profit maximization

b. Agency conflict

c. Efficient management

d. Satisfying stakeholders to maximize shareholder wealth maximization e.

e. None f the above

3. The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to

a. Maximize its expected total corporate income.

b. Maximize its expected EPS.

c. Minimize the chances of losses.

d. Maximize the stock price per share over the long run

e. Maximize the stock price on a specific target date.

4. Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and managers?

a. Pay managers large cash salaries and give them no stock options.

b. Change the corporation's formal documents to make it easier for outside investors to acquire a controlling interest in the firm through a hostile takeover.

c. Beef up the restrictive covenants in the firm’s debt agreements.

d. Eliminate a requirement that members of the board of directors must hold a high percentage of their personal wealth in the firm’s stock.

e. For a firm that compensates managers with stock options, reduce the time before options are vested, i.e., the time before options can be exercised and the shares that are received can be sold.

5. Which of the following statements is CORRECT?

a. The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of stockholders' equity.

b. The balance sheet gives us a picture of the firm’s financial position at a point in time.

c. The income statement gives us a picture of the firm’s financial position at a point in time.

d. The statement of cash flows tells us how much cash the firm must pay out in interest during the year.

e. The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.

6. Other things held constant, which of the following actions would increase the amount of cash on a company’s balance sheet?

a. The company repurchases common stock.

b. The company pays a dividend.

c. The company issues new common stock.

d. The company gives customers more time to pay their bills.

e. The company purchases a new piece of equipment.

7. While preparing a pro forma B/S, you have realized that A > L+E, you want to balance the B/S with increased short-term debt. What is (are) the problem(s) you may run into?

a. Increased debt

b. Increased liquidity

c. Decreased profit

d. Liquidity problem

e. Both increased debt and liquidity problem

8. On 12/31/08, Hite Industries reported retained earnings of $525,000 on its balance sheet, and it reported that it had $135,000 of net income during the year. On its previous balance sheet, at 12/31/07, the company had reported $445,000 of retained earnings. No shares were repurchased during 2008. How much in dividends did the firm pay during 2008?

a. $49,638

b. $52,250

c. $55,000

d. $57,750

e. $60,638

9. Shrives Publishing recently reported $10,750 of sales, $5,500 of operating costs other than depreciation, and $1,250 of depreciation. The company had $3,500 of bonds that carry a 6.25% interest rate, and its federal-plus-state income tax rate was 35%. During the year, the firm had expenditures on capital expenditure and net working capital that totaled $1,550. These expenditures were necessary for it to sustain operations and generate future sales and cash flows. What was its free cash flow?

a. $1,873

b. $1,972

c. $2,076

d. $2,185

e. $2,300

10. Moose Industries faces the following tax schedule:

Tax on Base Percentage on

Taxable Income of Bracket Excess above Base

Up to $50,000 $0 15%

$50,000-$75,000 7,500 25

$75,000-$100,000 13,750 34

$100,000-$335,000 22,250 39

$335,000-$10,000,000 113,900 34

$10,000,000-$15,000,000 3,400,000 35

Last year the company realized $10,000,000 in operating income (EBIT). Its annual interest expense is $1,500,000. What was the company’s net income for the year?

a. $4,809,874

b. $5,063,025

c. $5,329,500

d. $5,610,000

e. $5,890,500

11. The term “additional funds needed (AFN)” is generally defined as follows:

a. Funds that are obtained automatically from routine business transactions.

b. Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock, to support operations.

c. The amount of assets required per dollar of sales.

d. The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.

e. A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.

12. Spontaneously generated funds are generally defined as follows:

a. Assets required per dollar of sales.

b. A forecasting approach in which the forecasted percentage of sales for each item is held constant.

c. Funds that a firm must raise externally through borrowing or by selling new common or preferred stock.

d. Funds that arise out of normal business operations from its suppliers, employees, and the government, and they include spontaneous increases in accounts payable and accruals.

e. The amount of cash raised in a given year minus the amount of cash needed to finance the additional capital expenditures and working capital needed to support the firm’s growth.