Test Bank for Corporate Finance 3rd Edition Megginson, Smart, Graham
1. A company's balance sheet shows the value of assets, liabilities, and
... [Show More] stockholders' equity:
a. at the end of the fiscal year
b. for any given period of time
c. at a specific point in time
d. over an annual period
e. at the end of the calendar year
ANS: PTS: 1 REF: 2.1 OBJ: TYPE: fact retention
2. On a balance sheet, retained earnings are not "unspent cash" because:
a. they have been paid out to common stockholders
b. they have an arbitrarily assigned value
c. they are always changing
d. they have been used to finance the firm's assets
e. they are an estimate of future inflows
ANS: PTS: 1 REF: 2.1 OBJ: TYPE: fact retention
3. For both managers and external financial analysts, is the single most important accounting number found on the income statement.
a. net income (net profit after tax)
b. earnings before interest and taxes (EBIT)
c. earnings available for common stockholders
d. operating profit
e. gross margin
ANS: PTS: 1 REF: 2.1 OBJ: TYPE: fact retention
4. Earnings per share (EPS) is calculated by:
a. dividing pretax income by the number of shares of common stock outstanding
b. dividing the dividends paid by the number of shares of common stock outstanding
c. dividing earnings available for common stockholders by the number of shares of common stock outstanding
d. dividing net profits after tax by the total number of preferred and common stock shares outstanding
e. none of the above
ANS: PTS: 1 REF: 2.1 OBJ: TYPE: fact retention
5. Pennywise, Inc. had a great year. Sales reached an all-time high of $25 million, with a gross margin of
$7.5 million. Depreciation was recorded at $800000. Earnings before interest and taxes were $3 million, interest was $1.5 million, and total taxes were $700000. The firm's operating cash flow (OCF) was:
a. $3400000
b. $950000
c. $3100000
d. $2150000
e. $7100000
ANS:
OCF=EBIT- taxes + depreciation = 3 M – 0.7 M + 0.8 M = $3100000
PTS: 1 REF: 2.2 OBJ: TYPE: application of concepts
6. In May, GoGreen, Inc. increased its inventory of home composting kits, expecting sales to spike with warmer weather. This decision resulted in for the firm.
a. a decrease in depreciation expense
b. an increase in depreciation expense
c. an inflow of cash
d. an outflow of cash
e. a decrease in earnings
ANS: PTS: 1 REF: 2.2
OBJ: TYPE: application of concepts
7. While examining her firm's Statement of Cash Flows, Amy discovered an unusually large increase in accounts receivable. This might occur if:
a. the firm was holding more inventory
b. the firm had softened its credit requirements
c. sales had increased significantly
d. a & b
e. b & c
ANS: PTS: 1 REF: 2.2
OBJ: TYPE: application of concepts
8. Net working capital:
a. is a measure of a firm's overall liquidity
b. is defined as total assets minus current liabilities
c. reflects decreasing firm solvency as it increases
d. all of the above
e. none of the above
ANS: PTS: 1 REF: 2.2 OBJ: TYPE: fact retention
9. When evaluating financial ratios, analysts typically examine a firm's ratio values:
a. compared to firms in other industries
b. compared to the firm's previous years' ratios
c. compared to regional averages
d. compared to firms with similar net profit margins
e. all of the above
ANS: PTS: 1 REF: 2.3 OBJ: TYPE: fact retention
10. Why is the quick ratio a more appropriate measure of liquidity than the current ratio for a large- airplane manufacturer?
a. It recognizes the contribution of all assets so that analysts can see how "quickly" a firm can satisfy its short-term obligations.
b. It recognizes that parts can be quickly converted to cash.
c. It provides a better measure of overall liquidity when a firm has highly liquid inventory.
d. It is not more appropriate. The current ratio would provide better information in this situation.
e. It excludes inventory from the numerator of the ratio because it is difficult to convert inventory to cash and most sales are made on a credit basis.
ANS: PTS: 1 REF: 2.3
OBJ: TYPE: application of concepts
11. ratios would provide the best information regarding total return to common stockholders.
a. Profitability
b. Activity
c. Liquidity
d. Market
e. Debt
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