Multiple Choice Answers

Which one of the following will increase the future value of a lump sum invested today?
A. shortening the investment time period
B. paying interest only at the end of the investment period
C. increasing the rate of interest
D. decreasing the amount of the lump sum
E. paying simple interest rather than compound interest

The Fruit Co. has total assets of $7,800, fixed assets of $7,100, current liabilities of $1,500, and long-term liabilities of $4,600. What is the total debt ratio?
A. .86
B. .78
C. .65
D. .41
E. .60

The Du Pont identity helps financial managers determine:
I. why a firm’s return on equity is lower than anticipated.
II. the operating efficiency of a firm.
III. the utilization rate of a firm’s assets.
IV. the rate of return on a firm’s assets.
A. I and III only
B. II, III, and IV only
C. II and III only
D. I, II, and III only
E. I, II, III, and IV

When analyzing alternative capital structures for a firm, a financial manager must consider which of the following?
I. type of loan
II. amount of funds needed
III. cost of funds
IV. mix of debt and equity
A. II and IV only
B. I, III, and IV only
C. I, II, III, and IV
D. II, III, and IV only
E. I and III only

Walther Enterprises has accounts receivable of $52,700, total assets of $269,250, cost of goods sold of $147,900 and a capital intensity ratio of 1.25. What is the accounts receivables turnover rate?
A. 1.28
B. 2.04
C. 4.09
D. 2.81
E. 3.66

You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 6 percent interest. Approximately how long must you wait for your investment to double in value?
A. 12 years
B. 9 years
C. 8 years
D. 10 years
E. 6 years

Which of the following will increase the profit margin of a firm, all else constant?
I. increasing depreciation
II. decreasing cost of goods sold
III. decreasing the tax rate
IV. increasing interest expense
A. II and IV only
B. I and III only
C. I, II, and III only
D. I, II, III, and IV
E. II and III only

Which of the following are classified as tangible fixed assets?
I. inventory
II. machinery
III. patents
IV. building
A. II and III only
B. I and IV only
C. II and IV only
D. I and III only
E. II, III, and IV only

The value of an investment after one or more time periods is called the:
A. discounted value.
B. complex value.
C. future value.
D. present value.
E. true value.

Which one of the following is correct regarding a general partnership?
A. The profits of a general partnership are taxed the same as those of a corporation.
B. Each partner’s liability for the firm’s debts is limited to each partner’s investment in the firm.
C. Each partner has unlimited liability for the partnership debts.
D. A single partner is given total control over the daily operations of the partnership.
E. The profits of the firm are taxed as a separate entity.

Highland, Inc. has total assets of $16,200, net working capital of $3,900, owner’s equity of $8,500, and long-term debt of $6,000. What is the value of the current assets?
A. $2,500
B. $9,900
C. $6,300
D. $5,600
E. $10,200

Technical Services, Inc. has sales of $846,370, cost of goods sold of $672,500, and inventory of $10,930. How long on average does it take the firm to sell its inventory?
A. 22.95 days
B. 77.44 days
C. 4.71 days
D. 5.93 days
E. 61.53 days

Over the past year, a firm increased its current assets and decreased its current liabilities. As a result, the firm’s net working capital:
A. could have either increased, decreased, or remained constant.
B. was unaffected as the changes occurred in the firm’s current accounts.
C. had to decrease.
D. could have remained constant.
E. had to increase.
Which of the following will increase the liquidity level of a firm?
I. the purchase of inventory for cash
II. the sale of inventory on credit
III. the sale of inventory for cash
IV. the collection of accounts receivable
A. IV only
B. I, II, and III only
C. III and IV only
D. III only
E. II, III, and IV only

The Supply Co. has total equity of $639,400 and net income of $51,700. The debt-equity ratio is .55 and the total asset turnover is 1.4. What is the profit margin?
A. 3.73 percent
B. 6.68 percent
C. 7.24 percent
D. 4.86 percent
E. 8.99 percent

Which one of the following statements is correct, all else constant?
A. Increasing the inventory level will increase the days’ sales in inventory.
B. Increasing the inventory level will increase the inventory turnover rate.
C. Increasing sales will lower the total asset turnover.
D. Increasing sales will increase the capital intensity ratio.
E. Increasing the receivables turnover rate will increase the days’ sales in receivables.

Use the following tax table to answer this question:

Riddell, Inc. earned $144,320 in taxable income for the year. How much tax does the company owe on this income?
A. $49,069
B. $51,285
C. $39,535
D. $78,535
E. $56,285

Morgan’s Industrial Park has total assets of $541,700, long-term debt of $201,400, total equity of $306,800, fixed assets of $469,200, and sales of $600,500. The profit margin is 7 percent. What is the current ratio?
A. 1.59
B. 2.16
C. .46
D. .91
E. 1.01

Thirteen years from now, you will be inheriting $30,000. What is this inheritance worth to you today if you can earn 4 percent interest compounded annually?
A. $20,741.87
B. $23,190.98
C. $26,359.88
D. $28,846.15
E. $18,017.22

All else equal, which one of the following will increase owners’ equity?
A. increase in notes payable
B. decrease in inventory
C. increase in accounts receivable
D. increase in accounts payable
E. decrease in net working capital

Which one of the following statements about a limited partnership is correct?
A. The partnership is managed on a daily basis by its limited partners.
B. All partners have limited liability for partnership debts.
C. Partnership profits are taxed the same as corporate profits.
D. The partnership has an unlimited life.
E. Each limited partnership must have at least one general partner.

Bella’s Boutique has cash of $2,900 and accounts receivable of $4,200. The inventory cost $6,300 and can be sold today for $8,800. The fixed assets were purchased at a cost of $50,500 of which $23,200 has been depreciated. The fixed assets can be sold today for $25,000. What is the total book value of the assets of Bella’s?
A. $18,400
B. $38,900
C. $17,700
D. $63,900
E. $40,700

Paul is the owner of Paul’s Cabinets, which is a sole proprietorship. The firm cannot pay its bills because a large customer defaulted on payment. Which one of the following statements is correct given this situation?
A. Paul is personally liable for the firm’s debts but only to the extent of his investment in Paul’s Cabinets.
B. The only course of action the creditors of Paul’s Cabinets has is to sell the assets of Paul’s Cabinets.
C. Paul is personally liable for the entire debt of Paul’s Cabinets.
D. The creditors of Paul’s Cabinets can assume the assets of Paul’s Cabinets but only in an amount that exceeds Paul’s investment in the firm.
E. The creditors of Paul’s Cabinets can only collect payment if Paul’s Cabinets receives payment from its customer.

The control of a corporation ultimately lies with the:
A. chief financial officer.
B. chairman of the board.
C. company president.
D. company stockholders.
E. chief executive officer.

Which one of the following situations is most apt to create an agency problem?
A. The company president receives an annual bonus based on the market value of the firm’s stock.
B. A key employee is granted stock options on an annual basis.
C. A company researcher is paid a bonus whenever she develops a new method of production that increases the shelf life of the firm’s products.
D. Each employee is given a gift certificate for a free dinner for two whenever the firm remains accident-free for one year.
E. The production manager is granted an annual bonus based on the size of the firm’s total operations.

Limited liability companies:
A. are a hybrid between a sole proprietorship and a partnership.
B. are taxed like a corporation.
C. cannot be created for professional service firms, such as accountants and attorneys.
D. that meet IRS standards are taxed like a partnership.
E. provide limited liability for some, but not all, of its owners.

What is the future value of $4,900 invested for 8 years at 7 percent compounded annually?
A. $8,564.35
B. $8,536.85
C. $8,419.11
D. $5,629.53
E. $7,644.15

Amanda only has $600 today but needs $1,300 to buy a new laptop. How long will Amanda have to wait to buy the laptop if she earns 8 percent compounded annually on her money?
A. 9.86 years
B. 10.11 years
C. 10.05 years
D. 9.74 years
E. 9.93 years

Twenty years ago, you deposited $1,000 into an account. Fifteen years ago, you added an additional $3,000 to your account. You earned 6 percent, compounded annually, for the first 5 years and 10 percent, compounded annually, for the last 15 years. How much money do you have in your account today?
A. $18,121.84
B. $5,634.48
C. $4,925.34
D. $13,880.59
E. $19,369.43

The average tax rate is defined as the:
A. total tax paid divided by total revenue.
B. amount of tax due on the next dollar of taxable income.
C. amount of tax due on the next dollar of revenue.
D. total taxes divided by total taxable income.
E. total tax paid divided by total assets.

Which one of the following transactions occurred in the primary market?
A. Alpha, Inc., a publicly owned company, bought shares of New Town Press, also a publicly owned company.
B. Connie bought her first shares in a public company.
C. Valerie purchased newly issued shares of Velcro, Inc.
D. Prudoe Mfg. sold shares of Plastics Tech on NASDAQ.
E. Pete purchased shares of GPT from his friend, George.

Eli and Sons wants to evaluate its assets to determine if its mix of assets has changed over time. To do this, the firm should compile which one of the following financial statements for each of the past few years?
A. common-size income statement
B. common-size balance sheet
C. income statement
D. statement of cash flows
E. balance sheet

You have $2,000 today and want to quadruple your money in 10 years. What interest rate must you earn?
A. 23.11 percent
B. 11.61 percent
C. 20.13 percent
D. 7.18 percent
E. 14.87 percent

Lisa deposits $2,500 into an account paying 5 percent interest, compounded annually. At the same time, Jill deposits $2,500 into an account paying 2.5 percent interest, compounded annually. At the end of five years:
A. Lisa will have earned exactly twice the amount of interest as Jill earned.
B. Both Lisa and Jill will have earned the same amount of interest.
C. Lisa will have earned more than twice the amount of interest that Jill earned.
D. Jill will have earned more interest than Lisa.
E. Lisa will have earned somewhere between 1 and 2 times the amount of interest that Jill earned.
Which of the following correctly describe a dealer market?
I. Dealers match buyers with sellers.
II. Dealers buy and sell for themselves at their own risk.
III. Dealer trading occurs over-the-counter.
IV. Dealer transactions occur on a trading floor.
A. I and III only
B. II and III only
C. I, II, and III only
D. II and IV only
E. I and IV only
The process of managing a firm’s long-term investments is called:
A. risk management.
B. working capital management.
C. capital budgeting.
D. capital structure management.
E. asset allocation.

Which one of the following statements concerning market and book values is correct?
A. The current book value of equipment purchased last year is equal to the initial cost of the equipment.
B. Book values represent the amount of cash that will be received if an asset is sold.
C. The market value of fixed assets will always exceed the book value of those assets.
D. The market value of accounts receivable is generally much lower than the book value of those receivables.
E. The market and book values of current assets tend to be relatively equal.
By definition, a bank that pays simple interest on a savings account will pay interest:
A. on both the initial investment and all prior interest payments that are reinvested.
B. only if all previous interest payments are reinvested.
C. only at the end of the investment period.
D. only on the initial investment.
E. only at the beginning of the investment period.

Equitable Sales has total owner’s equity of $14,500. The firm has current assets of $4,900, current liabilities of $1,200, and total assets of $20,100. What is the value of the long-term debt?
A. $2,500
B. $3,700
C. $5,600
D. $700
E. $4,400
A firm has adopted a policy whereby it will not seek any additional external financing. Given this, what is the maximum growth rate of the firm if it has net income of $4,500, total equity of $40,000, total assets of $80,000, and a 70 percent dividend payout ratio?
A. 6.38 percent
B. 1.72 percent
C. 4.10 percent
D. 8.55 percent
E. 3.49 percent

Baldwin, Inc. paid $18,500 in dividends and $44,600 in interest over the past year while net working capital increased from $10,200 to $28,200. The company purchased $30,000 in net new fixed assets and had depreciation expenses of $15,700. During the year, the firm issued $45,000 in net new equity and paid off $16,000 in long-term debt. What is the amount of Baldwin’s cash flow from assets?
A. $30,200
B. $34,100
C. $48,000
D. $18,000
E. $3,700

Grandel, Inc. has current liabilities of $10,200 and accounts receivable of $14,800. The firm has total assets of $39,700 and net fixed assets of $18,900. The owners’ equity has a book value of $16,500. What is the amount of the net working capital?
A. $23,200
B. $10,600
C. $25,400
D. $20,800
E. $31,000

The primary goal of financial management is to maximize the:
A. market value of the existing stock.
B. current net income.
C. the number of shares outstanding.
D. revenue growth.
E. net working capital.

A firm has total assets of $456,000 and total equity of $217,000. What is the debt-equity ratio?
A. .48
B. 1.48
C. 2.10
D. 1.10
E. .68

Delmont Movers has a profit margin of 8 percent and net income of $64,000. What is the common-size percentage for the cost of goods sold if that expense amounted to $620,000 for the year?
A. 50.25 percent
B. 24.26 percent
C. 82.58 percent
D. 10.32 percent
E. 77.50 percent

Which of the following transactions will increase the liquidity of a firm?
I. purchasing equipment with cash
II. collecting an account receivable
III. selling inventory at cost
IV. selling inventory at a profit
A. I and III only
B. I and IV only
C. II, III, and IV only
D. II and III only
E. II and IV only

Which of the following will increase the sustainable growth rate of a firm?
I. eliminating all dividends
II. increasing the target debt-equity ratio
III. increasing the profit margin
IV. increasing the total asset turnover rate
A. I, II, and III only
B. I and II only
C. I, II, III, and IV
D. I, III, and IV only
E. II, III, and IV only

Which of the following will increase the total amount of interest earned on an investment? Assume all interest is reinvested.
I. increasing the frequency of the interest payments
II. decreasing the frequency of the interest payments
III. increasing the interest rate
IV. decreasing the interest rate
A. III only
B. I and III only
C. II and III only
D. I and IV only
E. II and IV only

When you discount money you are:
A. stating the rate of interest you require to invest your funds.
B. calculating the future value of a present amount.
C. offering to accept less value than that to which you are entitled.
D. agreeing to invest funds at a lower than normal rate of interest.
E. computing the present value of a future amount.

A firm’s current assets and current liabilities are referred to as the firm’s:
A. cash equivalents.
B. capital interest.
C. working capital.
D. capital structure.
E. net assets.