Multiple Choice
1- A business owned by a single individual is called a(n):
a.
b.
c.
d.
e.
Corporation.
Open structure.
Partnership.
Closed receivership.
Sole proprietorship
2- The possibility of conflict of interest between the stockholders and management of the
firm is called:
a.
b.
c.
d.
e.
The shareholders’ conundrum.
Corporate breakdown.
The agency problem.
Corporate activism.
Legal liability.
3- Which of the following is considered a “primary market” transaction?
I. You buy shares in the public offering of a start-up company in the
computer industry.
II. Your mother sells you the shares she purchased in your uncle’s latest
business venture.
III. You buy shares in General Motors from your closest friend.
a.
b.
c.
d.
e.
I and II only
I and III only
I, II, and III
I only
II only
4- An increase in the financial leverage of a firm as a result of an increase in outstanding
debt _____________ the potential reward to stockholders while __________ the
risk of financial distress or bankruptcy.
a.
b.
c.
d.
e.
decreases; decreasing
increases; increasing
increases; decreasing
decreases; increasing
does not affect; increasing
5- Operating cash flow is calculated as:
a.
b.
c.
d.
e.
EBIT + depreciation − taxes
EBIT + depreciation + taxes
EBIT  depreciation  taxes
EBIT  depreciation + taxes
None of the above
6- The financial ratio measured as net income divided by total equity is known as the
firm’s:
a.
b.
c.
d.
e.
Profit margin.
Return on assets.
Return on equity.
Asset turnover.
Earnings before interest and taxes (EBIT).
7- In words, what does a total asset turnover of 1.5 times mean?
a.
b.
c.
d.
e.
For each $1 of sales generated the firm has total assets of $1.50.
For each $1 of total assets, the firm generated $1.50 in sales.
For each $1 of total assets, the firm generated $1.50 in net income.
For each $1 of net income generated, the firm has total assets of $1.50.
The firm completely replaces its fixed assets 3 times each year, on average.
8- All else the same, which of the following occurs when a firm buys inventory with
cash?
a.
b.
c.
d.
e.
The quick ratio goes up if it was greater than one before the change.
The current ratio goes down if it was greater than one before the change.
The current ratio goes down if it was lower than one before the change.
The quick ratio declines but the current ratio remains unchanged.
The quick ratio goes up if it was lower than one before the change
9- A firm has a times interest earned ratio of 2.7 times. This means:
a.
b.
c.
d.
The firm generated enough cash to cover its interest expense 2.7 times.
The interest expense of this firm exceeded earnings before taxes by 2.7 times.
The firm has sufficient EBIT to cover its interest expense 2.7 times.
The net income of this firm is sufficient to cover its interest expense 2.7 times.
e. The firm earned $1.00 in EBIT for every $2.70 it paid out in interest.
10- You are choosing between investments offered by two different banks. One promises
a return of 10% for three years using simple interest while the other offers a return
of 10% for three years using compound interest. You should:
a. Choose the simple interest option because both have the same basic interest
rate.
b. Choose the compound interest option because it provides a higher return.
c. Choose the compound interest option only if the compounding is for monthly
periods.
d. Choose the simple interest option only if compounding occurs more than once
a year.
e. Choose the compound interest option only if you are investing less than
$5,000.