Course Code: Financial Management

Student Activity Sheet Module #8

Name: _________________________________________________________ Class number: ____

Section: ____________ Schedule: __________________________________ Date: ___________

Long Quiz 1 Materials:

General Instructions: SAS
1. Choose and write your answer for each item in a separate References:
answer sheet. Answers with erasures and/or superimpositions
will be marked incorrect. COC Teacher’s Guide

1. The form of organization for a business is not an important issue, as

this decision has very little effect on the income and wealth of the
firm's owners.

a. True
b. False

2. The major advantage of a regular partnership or a corporation as a form

of business organization is the fact that both offer their owners
limited liability, whereas proprietorships do not.

a. True
b. False

3. There are three primary disadvantages of a regular partnership: (1)

unlimited liability, (2) limited life of the organization, and (3)
difficulty of transferring ownership. These combine to make it
difficult for partnerships to attract large amounts of capital and thus
to grow to a very large size.

a. True
b. False

4. Two disadvantages of a proprietorship are (1) the relative difficulty of

raising new capital and (2) the owner's unlimited personal liability for
the business' debts.

a. True
b. False

5. One key value of limited liability is that it lowers owners' risks and
thereby enhances a firm's value.

a. True
b. False
6. If a firm's goal is to maximize its earnings per share, this is the best
way to maximize the price of the common stock and thus shareholders'
wealth.

a. True
b. False

7. If Firm A's business is to obtain savings from individuals and then

invest them in financial assets issued by other firms or individuals,
Firm A is a financial intermediary.

a. True
b. False

8. If an individual investor buys or sells a currently outstanding stock

through a broker, this is a primary market transaction.

a. True
b. False

9. Recently, Hale Corporation announced the sale of 2.5 million newly

issued shares of its stock at a price of $21 per share. Hale sold the
stock to an investment banker, who in turn sold it to individual and
institutional investors. This is a primary market transaction.

a. True
b. False

10. One of the functions of NYSE specialists is to facilitate trading by

keeping an inventory of shares of the stocks in which they specialize,
buying when investors want to sell and selling when they want to buy.
They change the bid and ask prices of the securities so as to keep
supply and demand in balance.

a. True
b. False

11. Which of the following statements is CORRECT?

a. A reduction in inventories held would have no effect on the current

ratio.
b. An increase in inventories would have no effect on the current
ratio.
c. If a firm increases its sales while holding its inventories
constant, then, other things held constant, its inventory turnover
ratio will increase.
d. A reduction in the inventory turnover ratio will generally lead to
an increase in the ROE.
e. If a firm increases its sales while holding its inventories
constant, then, other things held constant, its inventory turnover
ratio will decrease.
12. Companies E and P each reported the same earnings per share (EPS), but
Company E’s stock trades at a higher price. Which of the following
statements is CORRECT?

a. Company E probably has fewer growth opportunities.

b. Company E is probably judged by investors to be riskier.
c. Company E must have a higher market-to-book ratio.
d. Company E must pay a lower dividend.
e. Company E trades at a higher P/E ratio.

13. Which of the following statements is CORRECT?

a. If a firm has the highest price/earnings ratio of any firm in its

industry, then, other things held constant, this suggests that the
board of directors should fire the president.
b. If a firm has the highest market/book ratio of any firm in its
industry, then, other things held constant, this suggests that the
board of directors should fire the president.
c. Other things held constant, the higher a firm’s expected future
growth rate, the lower its P/E ratio is likely to be.
d. The higher the market/book ratio, then, other things held constant,
the higher one would expect to find the Market Value Added (MVA).
e. If a firm has a history of high Economic Value Added (EVA) numbers
each year, and if investors expect this situation to continue, then
its market/book ratio and MVA are both likely to be below average.

14. Which of the following statements is CORRECT?

a. Borrowing by using short-term notes payable and then using the

proceeds to retire long-term debt is an example of “window
dressing.” Offering discounts to customers who pay with cash rather
than buy on credit and then using the funds that come in quicker to
purchase additional inventories is another example of “window
dressing.”
b. Borrowing on a long-term basis and using the proceeds to retire
short-term debt would improve the current ratio and thus could be
considered to be an example of “window dressing.”
c. Offering discounts to customers who pay with cash rather than buy
on credit and then using the funds that come in quicker to purchase
additional inventories is an example of “window dressing.”
d. Using some of the firm’s cash to reduce long-term debt is an
example of “window dressing.”
e. “Window dressing” is any action that improves a firm’s fundamental,
long-run position and thus increases its intrinsic value.

15. Casey Communications recently issued new common stock and used the
proceeds to pay off some of its short-term notes payable. This action
had no effect on the company’s total assets or operating income. Which
of the following effects would occur as a result of this action?

a. The company’s current ratio increased.

b. The company’s times interest earned ratio decreased.
c. The company’s basic earning power ratio increased.
d. The company’s equity multiplier increased.
e. The company’s debt ratio increased.
16. A firm’s new president wants to strengthen the company’s financial position.
Which of the following actions would make it financially stronger?

a. Increase accounts receivable while holding sales constant.

b. Increase EBIT while holding sales constant.
c. Increase accounts payable while holding sales constant.
d. Increase notes payable while holding sales constant.
e. Increase inventories while holding sales constant.

17. If the CEO of a large, diversified, firm were filling out a fitness
report on a division manager (i.e., “grading” the manager), which of the
following situations would be likely to cause the manager to receive a
better grade? In all cases, assume that other things are held constant.

a. The division’s basic earning power ratio is above the average of

other firms in its industry.
b. The division’s total assets turnover ratio is below the average for
other firms in its industry.
c. The division’s debt ratio is above the average for other firms in
the industry.
d. The division’s inventory turnover is 6, whereas the average for its
competitors is 8.
e. The division’s DSO (days’ sales outstanding) is 40, whereas the
average for its competitors is 30.

18. Which of the following would indicate an improvement in a company’s

financial position, holding other things constant?

a. The inventory and total assets turnover ratios both decline.

b. The debt ratio increases.
c. The profit margin declines.
d. The EBITDA coverage ratio declines.
e. The current and quick ratios both increase.

19. If a bank loan officer were considering a company’s request for a loan,
which of the following statements would you consider to be CORRECT?

a. The lower the company’s EBITDA coverage ratio, other things held
constant, the lower the interest rate the bank would charge the
firm.
b. Other things held constant, the higher the debt ratio, the lower
the interest rate the bank would charge the firm.
c. Other things held constant, the lower the debt ratio, the lower the
interest rate the bank would charge the firm.
d. The lower the company’s TIE ratio, other things held constant, the
lower the interest rate the bank would charge the firm.
e. Other things held constant, the lower the current ratio, the lower
the interest rate the bank would charge the firm.

s20 Which of the following statements is CORRECT?

.

a. The use of debt financing will tend to lower the basic earning
power ratio, other things held constant.
b. A firm that employs financial leverage will have a higher equity
multiplier than an otherwise identical firm that has no debt in its
capital structure.
c. If two firms have identical sales, interest rates paid, operating
costs, and assets, but differ in the way they are financed, the
firm with less debt will generally have the higher expected ROE.
d. Holding bonds is better than holding stock for investors because
income from bonds is taxed on a more favorable basis than income
from stock.
e. All else equal, increasing the debt ratio will increase the ROA.