FIN202 – FUNDAMENTALS OF CORPORATE FINANCE

QUIZ TEST 1
NAME OF STUDENT:

1. A patent is a productive asset for a technology-based firm.

A)
True
B)
False
Ans: True

2. The most fundamental way that a business can grow in size is from the reinvestment of cash flows or earnings.
A)
True
B)
False
Ans: True

3. A good capital budgeting decision is one in which the benefits are worth more to the firm than the cost of the asset.
A)
True
B)
False
Ans: True
4. Unlimited liability means that the owner of a firm is responsible for paying all the firm's bills.
A)
True
B)
False
Ans: True

5. The external auditors of the firm report their findings directly to the CFO of the firm.
A)
True
B)
False
Ans:
false
6. Maximizing revenue should be the goal of the firm.
A)
True
B)
False
Ans: False
7. To start a business, the owners need
A) a market where there is demand for their product.
B) a clear vision of what products or services they want to produce.
C) the know-how to successfully market their product.
D) all of the above.
Ans: D
8. Which of the following factors or activities can be controlled by the management of a firm?
A) Capital budgeting.
B) The level of economic activity.
C) The level of interest rates.
D) Stock market conditions.
Ans: A
9. Which corporate officer, when he or she is guilty of serious misconduct, can subject the firm to the most serious losses in
financial wealth?
A) CEO
B) CFO
C) Chief Technology Officer
D) Chief Risk Officer
Ans: B

10. Which of the following powers does the audit committee have the authority to do?
A) audit the personal bank account of the CEO
B) question any person employed by the firm
C) audit the compensation files of firms in the same industry
D) none of the above
Ans: B

11. A good capital budgeting decision is

A) one in which the benefits of the project are equal to the cost of the asset.
B) one in which the benefits of the project are less than the cost of the asset.
C) one in which the benefits of the project are more than the cost of the asset.
D) all of the above.
Ans:
C
12. Which one of the following characteristics does not pertain to corporations?
A) Can enter into contracts
B) Can borrow money
C) Are the easiest type of business to form
D) Can be sued
E) Can own stock in other companies
Ans:
C
13. Depreciation and amortization expenses are:
A) Part of current assets on the balance sheet
B) After-tax expenses that reduce a firm’s cash flows
C) Long-term liabilities that reduce a firm’s net worth.
D) Noncash expenses that cause a firm’s after-tax cash flows to exceed its net income.
Ans D

14.The balance sheet identifies the productive resources (assets) that a firm uses to generate income, as well as the sources of
funding from creditors (liabilities) and owners (shareholders' equity) that were used to buy the assets.
A) True
B) False
Ans: A

15. Book value is the amount a firm paid for its assets at the time of purchase.
A) True
B) False
Ans: A

16. The net cash flow from operating activities (NCFOA) is another term for net income.
A) True
B) False
Ans: B

17. Cash flows from operations are the net cash flows that support a firm's principal business activities.
A) True
B) False
Ans: A

18. In a rising price environment, a company using the LIFO method assumes that the sale of a product is from the newest,
highest-cost inventory.
A) True
B) False
Ans:
A
19. 82.
19. Which of the following statements is true?
A) Only 20 percent of interest income is taxable income for a corporation.
B) Dividend income is fully taxable income.
C) Interest paid on debt obligations is a tax-deductible business expense.
D) Dividends paid to stockholders are a tax-deductible business expense.
Ans: A

20. Statement of Cash Flows – Cash from Financing Activities: Natural Lite, Inc. reported the following items during
fiscal 2010. The firm purchased marketable securities of $87,500, paid down a long-term loan in the amount of $650,000,
purchased $4,250,000 of new equipment. The firm also sold $6,250,000 of common stock, paid $350,225 in dividends to its
common shareholders, and repurchased $1,250,000 of common stock in the open market. What is the net cash provided by
financing activities? (Round off to the nearest)
A) $4,575,210
B) $1,733,285
C) $3,999,775
D) $2,467,915
Ans: C
21. BEBIT: Arco Steel, Inc. generated total sales of $45,565,200 during fiscal 2010. Depreciation and amortization for the
year totaled $2,278,260, and cost of goods sold was $27,339,120. Interest expense for the year was $9,641,300 and selling,
general, and administrative expenses totaled $4,556,520 for the year. What is Arco’s EBIT for 2010?
A) $9,641,300
B) $11,391,300
C) $13,275,030
D) $18,490,000
Ans: B

22. Parrino Corporation has announced that its net income for the year ended June 30, 2008, is $1,824,214. The company
had an EBITDA of $ 5,174,366, and its depreciation and amortization expense was equal to $1,241,790. The company's
average tax rate is 34 percent. What is the amount of interest expense for the firm?
A) $2,763,961
B) $939,747
C) $1,187,720
D) $1,168,615
Ans: A

23. re-Bien Bakeries generated net income of $233,412 this year. At year end, the company had accounts receivables of
$47,199, inventory of $63,781, and cash of $21,461. It also had accounts payables of $51,369, short-term notes payables of
$11,417, and accrued taxes of $6,145. The net working capital of the firm is
A) $68,931
B) $63,510
C) $69,655
D) none of the above
Ans: B

24. Which one of the following does NOT belong on an income statement?
A) depreciation and amortization
B) goodwill
C) extraordinary items
D) nonrecurring expenses
Ans:
B
25. Managers' decisions regarding financing, investment, and working capital are reflected in the financial statements.
A) True
B) False
Ans: A

26. A benchmark for a financial statement analysis is the performance of a multinational firm in the same industry from
another country.
A) True
B) False
Ans:
B
27. The purchase of additional inventory by a firm should decrease a firm's quick ratio.
A) True
B) False
Ans: A

28. There are those that believe that the analysis of financial statements has limitations. Which of the statements below
would qualify as a limitation of financial statement analysis?
A) Ratio analysis requires the analyst to evaluate a firm’s performance over too many years to be of any value.
B) Proper ratio analysis requires the analyst to rely upon audited financial statements, which can be easily manipulated.
C) Thorough ratio analysis requires the analyst to refer to benchmarking, which is very easy to misinterpret.
D) Ratio analysis requires the analyst to utilize accounting data that is based on historical costs instead of current market
values.
Ans:
D
29. Which of the following is a benefit of a common-size income statement?
A) It is very useful to assess how effectively a firm collected its accounts receivable.
B) It reveals a great deal of information about the adequacy of a firm’s net working capital.
C) It can tell the analyst a great deal about the firm’s efficiency and profitability.
D) It reveals how effectively a firm has increased its sales.
Ans: C

30. DuPont equation: Andrade Corp has debt of $2,834,950, total assets of $5,178,235, sales of $8,234,121, and net income
of $812,355. What is the firm's return on equity?
A)7.1%
B) 34.7%
C) 28.1%
D) 43.2%
Ans: C

31. Profitability ratio: Juventus Corp has total assets of $4,744,288, total debt of $2,912,000, and net sales of $7,212,465.
Their net profit margin for the year is 18 percent. What is Juventus's ROA?
A) 25.6%
B) 18%
C) 27.4%
D) None of the above
Ans: B

32. Liquidity ratio: Ronaldinho Trading Co. is required by its bank to maintain a current ratio of at least 1.75, and its current
ratio now is 2.1. The firm plans to acquire additional inventory to meet an unexpected surge in the demand for its products
and will pay for the inventory with short-term debt. How much inventory can the firm purchase without violating its debt
agreement if their total current assets equal $3.5 million?
A) $0
B) $777,777
C) $1 million
D) None of the above
Ans: C

33. Which one of the following statements about trend analysis is NOT correct?
A) This benchmark is based on a firm's historical performance.
B) It allows management to examine each ratio over time and determine whether the trend is good or bad for the firm.
C) The Standard Industrial Classification (SIC) System is used to identify benchmark firms.
D) All of the above are true statements.
Ans: C

34. For a firm that has no debt in its capital structure,

A) ROE > ROA.
B) ROE < ROA.
C) ROE = ROA.
D) None of the above.
Ans: C

35. Which one of the following does NOT change a firm's current ratio?
A) The firm collects on its accounts receivables.
B) The firm purchases inventory by taking a short-term loan.
C) The firm pays down its accounts payables.
D) None of the above.
Ans:
B