Which of the following is NOT true for a limited partnership?
1. Maximization of shareholder wealth as a goal is superior to profit maximization because:
a. it considers the time value of the money.
b. following the goal of shareholder wealth maximization will ensure high stock prices.
c. it considers uncertainty.
d. A and C
2) Which of the following is NOT true for a limited partnership?
a. Limited partners may sell their interest in the company.
b. Limited partners can only manage the business.
c. One general partner must exist who has unlimited liability.
d. Only the name of general partners can appear in the name of the fi rm.
3) Revenues are taxed
a. to achieve socially desirable goals.
b. to provide revenues for government expenditures.
c. for economic stabilization.
d. all of the above
4) Which of the following categories of owners have unlimited liability?
a. general partners in a limited partnership
b. sole proprietors
c. shareholders of a corporation
d. both A and B
5) Emery Inc. had $5 million of gross income, operating expenses of $1 million, paid $1 million of interest on borrowing of $10 million, and paid a dividend of $0.50 million. Emery Inc.’s taxable income is
a. $4 million.
b. $3 million.
c. $3.5 million.
d. $2.5 million.
Final Examination
6) Given the following tax rate schedule, what is the tax liability for a corporation with taxable income of $8 million?
Corporate Tax Rates Taxable Income
15% $0 – $50,000
25% $50,001 – $75,000
34% $75,001 – $10,000,000
35% over $10,000,000
Additional surtax of 5% on income between $100,000 and $335,000
Additional surtax of 3% on income between $15,000,000 and $18,333,333
a. $2,715,000
b. $2,720,000
c. $2,694,500
d. $2,708,250
7) Company A reports sales of $100,000 and net income of $15,000. Company B reports sales of $100,000 and net income of $10,000. Therefore:
a. Company A’s cash flow may be higher or lower than Company B’s cash flow
even though A’s net income is higher.
b. Company B is creating less value for its shareholders than Company A.
c. Company B’s accounts receivable must be higher than Company A’s accounts
receivable.
d. Company A’s cash flow is $5,000 more than Company B’s cash flow.
8) The CEO of High Tech International decides to change an accounting method at the end of the current year. The change results in reported profits increasing by 5%, but the company’s cash flows are not changed. If capital markets are efficient, then:
a. The stock price will increase due to higher profits.
b. The stock price will not be affected by the accounting change.
c. The stock price will decrease because accounting method changes are not
permitted under generally accepted accounting principles.
d. The stock price will increase only if the accounting change will also result in
higher profits in the next year.
9) The curse of competitive markets
a. May be lessened by obtaining patents for new ideas that protect companies
from competitors.
b. Implies that profitable industries will become smaller as companies drop out
to avoid competition.
c. Means that money spent on innovation is wasted because competitors will
rush in and eliminate any excess profits.
d. Means that companies cannot earn exceptional profits.
10) Which of the following statements best represents the “Agency Problem”?
a. The agency problem results from the separation of management and the ownership
of the firm.
b. The agency problem may interfere with the implementation of maximizing
shareholder wealth.
c. Managers might attempt to benefi t themselves in terms of salary and perquisites
at the expense of shareholders.
d. all of the above
11) U.S. corporations finance their activities
a. mainly with equity because equity does not expire or need to be paid back.
b. mainly with equity because the U.S. tax system favors equity over debt.
c. mainly with corporate debt, partially because the U.S. tax system favors debt over equity.
d. equally with debt and equity.
12) All of the following securities are sold in money markets except:
a. 6-month certificates of deposit
b. common stock
c. commercial paper
d. 3-month U.S. Treasury Bills
13) Which of the following is an advantage of organized stock exchanges?
a. Only profitable companies may issue new securities on an organized exchange.
b. screening companies to ensure only low risk stocks are sold
c. providing a continuous market
d. increased stock price volatility
14) An example of a secondary market transaction involving a capital market security is:
a. The transfer of a previously-issued security with a very long maturity.
b. The transfer of a previously-issued security with a very short maturity.
c. A new issue of a security with a very short maturity.
d. A new issue of a security with a very long maturity.
15) Money market transactions include which of the following?
a. Securities that have a maturity of less than one year
b. All securities paid for with the proceeds of a money market account
c. 30-year U.S. Treasury bonds
d. Any security that is paid for with cash
16) Private placements are
a. especially appealing to new, small, and medium-sized companies.
b. limited to equity securities.
c. available for both debt and equity securities, but the market is dominated by
equity issues.
d. limited to debt securities.
17) The Sarbanes-Oxley Act of 2002, in order to protect investors, requires a higher level of accountability for which of the following groups?
a. corporate officers
b. boards of directors
c. public accountants
d. all of the above
18) What was the average annual rate of return on 3-month U.S. Treasury bills during the period 1981 to 2005?
a. 10.4%
b. 5.68%
c. 3.84%
d. 6.99%
19) Which of the following securities will likely have the highest default risk premium?
a. U.S. Treasury Bill
b. Bbb-rated corporate bond maturing in 2020 actively traded on a major exchange
c. Aaa-rated corporate bond maturing in 2015 not actively traded
d. U.S. Treasury Bond maturing in 2027
20) The real rate of return is the return earned above the
a. variability of returns measured by standard deviation.
b. inflation risk premium.
c. default risk premium.
d. risk-adjusted return.
Final Examination
21) Li Retailing reported the following items for the current year: Sales = $2,000,000; Cost of Goods Sold = $1,200,000; Depreciation Expense = $140,000; Administrative Expenses = $170,000; Interest Expense = $40,000; Marketing Expenses = $60,000; and Taxes = $20,000. Li’s gross
profit is equal to:
a. $410,000
b. $800,000
c. $490,000
d. $430,000
22) Which of the following statements concerning net income is most correct?
a. Negative net income reduces a company’s cash balance.
b. Net income represents sales minus operating expenses at a specific point in time.
c. Net income represents cash available to pay dividends.
d. Net income represents income that may be reinvested in the firm or distributed to its owners.
Table 3-1
Jones Company Financial Information
December 2007 December 2008
Net income $2,000 $5,000
Accounts receivable 750 750
Accumulated depreciation 1,000 1,500
Common stock 4,500 5,000
Paid-in capital 7,500 8,000
Retained earnings 1,500 2,500
Accounts payable 750 750
23) Based on the information in Table 3-1, assuming that no common stock was repurchased during the year, the firm issued how much new common stock during 2008?
a. $1,500
b. $1,000
c. $2,000
d. $500
24) What information does a firm’s balance sheet provide to the viewing public?
a. A complete listing of all of a firm’s cash receipts and cash expenditures for a defined period of time.
b. A report of revenues and expenses for a defined period of time.
c. A report of investments made and their cost for a specific period of time.
d. An itemization of all of a firm’s assets, liabilities, and equity as of the balance sheet date.
25) Which of the following accounts does NOT belong on the asset side of a balance sheet?
a. Cash
b. Accounts receivable
c. Accumulated depreciation
d. Accruals
26) Which of the following accounts does NOT belong in the liability section of a balance sheet?
a. Accumulated depreciation
b. Long-term debt
c. Accruals
d. Accounts payable
27) Which of the following accounts belongs in the equity section of a balance sheet?
a. Dividends
b. Retained earnings
c. Long-term debt
d. Cash
Table 3-1
Jones Company Financial Information
December 2007 December 2008
Net income $2,000 $5,000
Accounts receivable 750 750
Accumulated depreciation 1,000 1,500
Common stock 4,500 5,000
Paid-in capital 7,500 8,000
Retained earnings 1,500 2,500
Accounts payable 750 750
28) Based on the information in Table 3-1, calculate the after tax cash fl ow from
operations for 2008 (no assets were disposed of during the year, and there
was no change in interest payable or taxes payable).
a. $6,500
b. $3,375
c. $3,750
d. $5,500
29) Which of the following best describes free cash flow?
a. After-tax cash flows from operations, minus the increase in operating working capital, minus the increase in fixed and other assets
b. EBIT, minus interest expense, minus income taxes
c. Gross profit, minus EBIT
d. Operating profit, minus interest and depreciation
30) Higher inventory turnover suggests that
a. the company’s inventory is more liquid.
b. the company’s inventory is somewhat obsolete.
c. the company has a higher inventory balance.
d. the company’s sales are higher.
31) The current ratio of a firm would be increased by which of the following?
a. Inventories are sold for cash.
b. Equipment is purchased, financed by a long-term debt issue.
c. Land held for investment is sold for cash.
d. Inventories are sold on a credit basis.
32) The current ratio of a firm would be decreased by which of the following?
a. Inventories are sold on a long-term credit basis.
b. Equipment is purchased, financed by a long-term debt issue.
c. Inventories are sold for cash.
d. Land held for investment is sold for cash.
33) Given an accounts receivable turnover of 20 and annual credit sales of $400,000, the average…
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