Answer: b
Question: Which of the following is an example of a capital market instrument? a. Commercial paper. b. Preferred stock. c. U.S. Treasury bills. d. Banker’s acceptances. e. Money market mutual funds.
Answer: b
Question: Which of the following statements is CORRECT? a. Dividends paid reduce the net income that is reported on a company’s income statement. b. If a company uses some of its bank deposits to buy short-term, highly liquid marketable securities, this will cause a decline in its current assets as shown on the balance sheet. c. If a company issues new long-term bonds to purchase fixed assets during the current year, this will increase both its reported current assets and current liabilities at the end of the year. d. Accounts receivable are reported as a current liability on the balance sheet. e. 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.
Answer: e
Question: Which of the following statements is NOT CORRECT?
Answer Options:
a. When a corporation’s shares are owned by a few individuals, we say that the firm is “closely, or privately, held.”
b. “Going public” establishes a firm’s true intrinsic value and ensures that a liquid market will always exist for the firm’s shares.
c. The stock of publicly owned companies must generally be registered with and reported to a regulatory agency such as the SEC.
d. When stock in a closely held corporation is offered to the public for the first time, the transaction is called “going public, or an IPO,” and the market for such stock is called the new issue or IPO market.
e. It is possible for a firm to go public and yet not raise any additional new capital for the firm itself.
Answer: b
Question: The fact that 70% of the interest income received by corporations is excluded from its taxable income encourages firms to finance with more debt than they would in the absence of this tax law provision.
Answer Options:
a. True
b. False
Answer: b (The correct answer is True because the tax exclusion on a portion of interest income can be an incentive for corporations to finance with debt rather than equity.)
Question: Which of the following statements is CORRECT?
Answer Options:
a. The balance sheet for a given year is designed to give us an idea of what happened to the firm during that year.
b. The balance sheet for a given year tells us how much money the company earned during that year.
c. The difference between the total assets reported on the balance sheet and the liabilities reported on this statement tells us the current market value of the stockholders’ equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP).
d. If a company’s statements were prepared in accordance with generally accepted accounting principles (GAAP), the market value of the stock equals the book value of the stock as reported on the balance sheet.
e. The assets section of a typical company’s balance sheet begins with cash, then lists the assets in the order in which they will probably be converted to cash, with the longest lived assets listed last.
Answer: e
Question: Which of the following statements is CORRECT? a. Actions that increase reported net income will always increase cash flow. b. One way to increase EVA is to generate the same level of operating income but with less total invested capital. c. One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free. d. One way to increase EVA is to achieve the same level of operating income but with more total invested capital obtained at a higher cost of capital. e. If a firm reports positive net income, its EVA must also be positive.
Answer: b
Question: The balance sheet measures the flow of funds into and out of various accounts over time, while the income statement measures the firm’s financial position at a point in time.
Answer Options:
a. True
b. False
Answer: b
Question: Companies typically provide four basic financial statements: the fixed income statement, the current income statement, the balance sheet, and the cash flow statement.
Answer Options:
a. True
b. False
Answer: b
Question: Which of the following statements is CORRECT? a. Most rapidly growing companies have positive free cash flows because cash flows from existing operations generally exceed fixed asset purchases and changes to net operating working capital. b. Changes in working capital have no effect on free cash flow. c. Free cash flow (FCF) is defined as follows: FCF = EBIT(1 – T) + Depreciation – Capital expenditures required to sustain operations – Required changes in net operating working capital. d. Free cash flow (FCF) is defined as follows: FCF = EBIT(1 – T) + Capital expenditures. e. Managers should be less concerned with free cash flow than with accounting net income. Accounting net income is the “bottom line” and represents how much the firm can distribute to all its investors, both creditors and stockholders.
Answer: c
Question: Austin Financial recently announced that its net income increased sharply from the previous year, yet its net cash provided from operations declined. Which of the following could explain this performance? a. The company’s dividend payment to common stockholders declined. b. The company’s expenditures on fixed assets declined. c. The company’s cost of goods sold increased. d. The company’s depreciation expense declined. e. The company’s interest expense increased.
Answer: d
Question: If we were describing the income statement and the balance sheet, it would be correct to say that the income statement is more like a video while the balance sheet is more like a snapshot.
Answer Options:
a. True
b. False
Answer: a