Sample Multiple Choice Questions 1. The effect of a stock dividend (i.e., stock split) is that it a. Reduces owner s equity. b. Increases retained earnings. c. Reduces the liabilities of the firm. d. Increases the number of outstanding shares. 2. The DuPont ratio separates ROE into three components. Using the DuPont method and assuming turnover and profit margin are held constant, increasing the leverage (amount of debt) of the firm would affect the ROE in which way? a. Decrease ROE b. Increase ROE c. Remain unchanged d. The DuPont ratio does not consider leverage 3. As an investor, you are analyzing a firm s statement of cash Taken alone, which of the following would indicate the strongest outlook/performance? a. Positive operations cash flow, negative investing cash flows, and positive financing cash b. Positive operations cash flow, negative investing cash flows, and negative financing cash c. Positive operations cash flow, positive investing cash flows, and negative financing cash d. Negative operations cash flow, negative investing cash flows, and positive financing cash e. Negative operations cash flow, negative investing cash flows, and negative financing cash 4. A debit a liability and an asset. a. Decreases; increases b. Decreases; decreases c. Increases; increases d. Increases; decreases 5. A common-size income statement is an accounting statement that expresses all of a firm s expenses as a percentage of: a. Total assets b. Total equity c. Net income d. Taxable income e. Revenue 6. Which of the following financial statements gives a financial picture of a firm at a point in time? a. Income statement b. Statement of cash flows c. Balance sheet d. Creditor s statement Page 1
7. All of the following represent actual cash outflows of the firm except: a. Interest payments b. Amortization c. Taxes d. Cost of goods sold 8. Liquidity ratios are used to. a. Measure how well the company uses and manages its assets. b. Measure the company s ability to meet short term obligations. c. Measure how efficiently the company produces returns. d. Measure how well the company uses borrowed funds. 9. At the end of 2010 a company reported $575 million in net fixed assets. At the end of the prior year, the net fixed asset amount reported was $400 million. Assuming the company reported a depreciation expense of $50 million, how much did the company invest in additional fixed assets during 2010? a. $125 Million b. $175 Million c. $225 Million d. $275 Million 10. The Asset Turnover Ratio is an example of an efficiency ratio. This category of financial ratios seeks to answer which of the following questions? a. Whether or not the firm can meet their short-term debt obligations? b. How well the firm is utilizing the assets it has in place? c. Whether or not the shareholders are earning an acceptable return on their investment? d. What is the profitability of the firm? 11. Which of the following actions is most likely to directly increase cash as shown on a firm s balance sheet? a. It issues $2 million of new common stock. b. It buys new plant and equipment at a cost of $3 million. c. It reports a large loss for the year. d. It decreases the dividends paid on its common stock. 12. Which of the following is descriptive of common stock? a. It represents proportional ownership of the firm b. It is guaranteed to pay a dividend c. It represents a more senior claim on the firm s assets than preferred stock d. It is stock repurchased by the firm that issued it 13. Depreciation expense does which of the following for a profitable firm? a. Increases net income b. Increases net fixed assets c. Decreases net working capital d. Lowers taxes e. Has no effect on net income 14. A common-size balance sheet helps financial managers determine: a. Which customers are paying on a timely basis. b. If costs are increasing faster or slower than sales c. If changes are occurring in a firm s asset composition (asset mix). d. If a firm is generating more or less sales per dollar of assets than in prior years. e. The rate at which the firm s dividends are changing. Page 2
15. Dave s Potatoes has a profit margin of 5%, a total asset turnover of 1.2, and an equity multiplier of 3. What is Dave s return on equity? a. 13.5% b. 18.0% c. 21.8% d. 23.3% e. 32.0% 16. While reviewing a firm s financials you notice that, relative to the previous year, the firm s EBITDA increased, yet cash as reported on the balance sheet decreased. Which of the following factors could explain this outcome? a. The firm cut its dividend. b. The firm made a large investment in a new plant. c. The firm sold a division and received cash in return. d. The firm issued new common stock. e. The company issued new long-term debt. 17. Considered alone, which of the following would increase a company s current ratio? a. An increase in net fixed assets. b. An increase in accrued liabilities. c. An increase in notes payable. d. An increase in accounts receivable. e. An increase in accounts payable. 18. Awesome-O Industries recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. Assuming nothing else changes, this transaction would: a. Decrease the firm s equity multiplier. b. Increase the firm s asset turnover ratio. c. Increase the firm s return on assets (ROA). d. Decrease the firm s long-term debt. e. None of the above. 19. Commercial banks have an average ROA of roughly 1.2%. If average ROE in the industry is 11.7%, what is the average equity multiplier for commercial banks? a. 8.35 b. 8.75 c. 9.40 d. 9.75 e. Cannot tell from the information given In-Class Quiz Questions 1. In the standard corporate structure, the serves to represent the shareholders interest and oversee management. a. Chief Executive Officer b. Risk Management Officer c. Board of Directors d. Chief Operating Officer Page 3
2. Which corporate form is most common for owner-operator type businesses? a. Proprietorship b. Partnership c. Corporation d. None of the above 3. An executive uses firm money to fly himself and his family to the Maldives for vacation. This is an example of. a. A stockholder-debtholder issue b. An agency issue c. A poor managerial compensation package d. None of the above 4. The primary financial goal of management is. a. Shareholder wealth maximization b. Maximizing shareholder returns c. Growing the business into a conglomerate d. Both A and B e. None of the above 5. A debit a liability and an asset. a. Decreases; increases b. Decreases; decreases c. Increases; decreases d. Increases; increases 6. Which of the following is descriptive of common stock? a. It represents proportional ownership of the firm b. It is guaranteed to pay a dividend c. It represents a more senior claim on the firm s assets than preferred stock d. It is stock repurchased by the firm that issued it 7. Depreciation expense does which of the following for a profitable firm? a. Increases net income b. Increases net fixed assets c. Decreases net working capital d. Lowers taxes 8. A common-size income statement is an accounting statement that expresses all of a firm s expenses as a percentage of what? a. Total assets b. Total equity c. Net Income d. Revenue 9. Which of the expenses would you expect to be largest, as a percentage of revenues, for a retailing firm? a. Selling, general, and administrative (SG&A) b. Depreciation c. Taxes d. Costs of goods sold Page 4
10. You want to get a better understanding of how a firm is using debt. To answer this question, you would most likely look at which category of financial ratios? a. Activity ratios b. Profitability ratios c. Leverage ratios d. Liquidity ratios 11. All else equal, if a firm increases their total asset turnover, then you would expect ROE to. a. Increase b. Decrease c. Stay the same d. Cannot tell from the information given 12. All else equal, which of the following would be most beneficial for a retail firm? a. A decrease in operating margin b. A decrease in total asset turnover c. A decrease in average inventory age d. A decrease in DuPont ROE 13. You want to get a better understanding of a firm's ability to meet its short-term obligations. To answer this question, you would most likely look at which category of financial ratios? a. Activity ratios b. Profitability ratios c. Leverage ratios d. Liquidity ratios 14. If a firm uses debt as a source of financing, then, all else equal, they would prefer that their coverage ratio. a. Increase b. Decrease c. Stays the same d. Cannot tell from the information given Sample Time Value of Money Problems 1. What is the effective annual rate when a bank advertises that it pays 10% compounded semiannually? 2. What is the effective annual rate when a bank advertises that it pays 10% compounded daily? 3. What is the present value of $10,000 payable 15 months from now assuming a bank pays 8% compounded quarterly? 4. What is the present value of $10,000 payable 16 months from now assuming a bank pays 8% compounded quarterly? 5. How long would it take $15,000 to double assuming you can get 9% on your investment compounded annually? Page 5
6. What is the future value of $150 at 9% compounded monthly one year from now? 7. What is the present value of $285 payable 3 years from now assuming 11% interest compounded semi-annually? 8. If you wanted to have $5000 in 10-years on a deposit of $2000, what annual rate of return would you need? (Hint: solve for i) 9. What is the annual effective rate when a bank advertises that it will pay 12% compounded semiannually? Quarterly? Monthly? Daily? Page 6
ANSWER KEY: Sample Multiple Choice Questions 1. D 2. B 3. B 4. A 5. E 6. C 7. B 8. B 9. C 10. B 11. A 12. A 13. D 14. C 15. B 16. B 17. D 18. A 19. D Sample TVM Problems 1. 10.25% 2. 10.52% 3. $9,057.31 4. $8,997.72 5. 8.043 years 6. $164.07 7. $206.70 8. 9.60% 9. Semi-Annually 12.36% Quarterly 12.55% Monthly 12.68% Daily 12.75% In-Class Quiz Questions 1. C 2. A 3. B 4. D 5. A 6. A 7. D 8. D 9. D 10. C 11. A 12. C 13. D 14. A Page 7