Southern New Hampshire University
FIN-320 Principles of Finance
EXAM 9 questions and answers
1
According to the DuPont equation, if the profit margin increases, which of the following also
grows?
ROE
shareholder equity
stock price
asset turnover
CONCEPT
The DuPont Equation
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2
Gregor needs to know exactly how much revenue his company generated in the first quarter of the
year.
What type of financial statement should he look at?
Balance sheet
Statement of changes in equity
Income statement
Cash flow statement
CONCEPT
Introducing Financial Statements
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3
What is the cause of agency costs?
Conflicts of interest
Stock market declines
Bond maturations
Mergers and acquisitions
CONCEPT
Agency and Conflicts of Interest
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4
The first step of financial forecasting is .
capacity planning
sales forecasting
modeling
estimating AFN
CONCEPT
Financial Forecasting
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5
The purpose of a pro forma balance sheet is to .
track changes in return on equity over time
ensure that assets equal liabilities plus equity
determine the likely effects of a company's strategic plan
analyze market conditions
CONCEPT
Forecasting the Balance Sheet
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6
Which of the following would explain a company’s inventory turnover ratio rising from 1.75 to 3?
The company's cost of goods sold has decreased while the average
inventory has remained constant.
The company's cost of goods sold has increased while the average
inventory has remained constant.
The company's cost of goods sold has remained constant while the
average inventory has increased.
The company's cost of goods sold has decreased while the average
inventory has increased.
CONCEPT
Asset Management Ratios
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7
If a balance sheet shows owner's equity of $12 million, current liabilities of $2 million and long-term liabilities of
$4 million, then what are the total assets of the company?
Under GAAP, how would cash generated from product sales be accounted for on the statement of cash flows?
As a decrease in cash flow from investment
As an increase in cash flow from operations
As an increase in cash flow from financing
As an increase in cash flow from investment
CONCEPT
The Statement of Cash Flows
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9
Ratios that measure a company's ability to generate earnings are .
profitability ratios
efficiency ratios
market ratios
leverage ratios
RATIONALE
CReOpNoCrtEaPnTissue with
this question Overview of
Ratio Analysis
10
Consider the P/E ratios of the following companies:
•Company A: 5.34
•Company B: 3.33
•Company C: 7.90
•Company D: 6.75
Company C is more per unit of current net income than Company B.
volatile
affordable
expensive
economical
CONCEPT
Market Value Ratios
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11
The forecast budget helps manage .
investment needs
cash and liquidity needs
float
inventory needs
CONCEPT
Building a Cash Budget
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12
What is a question that should be asked about accounts receivable when forecasting?
When do our creditors expect payment?
What will we owe to our suppliers?
How will this affect our cash conversion cycle?
What percentage of sales will likely be made with cash?
CONCEPT
Analyzing Forecasts
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13
The of a company is calculated by multiplying the number of shares outstanding by the
price of each share.
market value
book value
shareholder value
asset value
CONCEPT
Goals of Financial Management
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14
When are pro forma income statements prepared?
At the end of every month
When shareholders ask for historical data
In advance of a significant transaction
When sales decrease
CONCEPT
Forecasting the Income Statement
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15
What principle of corporate governance requires companies to operate in ways that respect the social
and legal relationships they have with employees and creditors, among others?
Interests of other stakeholders
Role of the board
Integrity and ethical behavior
Disclosure and transparency
CONCEPT
Corporate Governance
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16
In which scenario would benchmarking be most useful?
Comparing financial ratios of a company in telecommunications to
a company in mining
Comparing financial ratios of a company in fishing to a company in
banking
Comparing financial ratios of a company in retail sales to a
company in farming
Comparing financial ratios of two companies in auto manufacturing
CONCEPT
Using Financial Ratios for Analysis
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17
Orla has several potential investors in her business. They want to know how much profit is typically made by
the company each year, so they consult her income statements from the last five years.
Which of the following should they focus on?
Net sales
Net income
Total revenue
Gross profit
CONCEPT
The Income Statement
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18
Jerome and his roommate are launching a business repairing cars. They plan to own the business and share the
profits equally and they don't want a complicated business structure that requires them to file annual reports.
Which form of business structure would clearly meet their needs?
Partnership
S corporation
Corporation
Sole proprietorship
CONCEPT
Types of Business Organizations
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19
Which of the following is true of ethics and its application to the business environment?
Ethics are principles relating to right and wrong conduct and
are pertinent to both individuals and business organizations.
Ethics are a set of religious beliefs and do not apply to
businesses that operate in secular countries.
Ethics are the moral principles that guide personal behavior
but they have little relevance to businesses.
Ethics are the laws that govern behavior and businesses must
follow them.
CONCEPT
Ethics: An Overview
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20
The recent trend known as extends credit to people or organizations who may have
struggled to obtain it in the past.
venture capital
algorithmic trading
underwriting
microfinancing
CONCEPT
Trends and Issues in Finance
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21
How are liabilities typically organized on a balance sheet?
In order of value, with smallest liabilities first.
In order of value, with largest liabilities first.
In order of how soon they come due, with long-term debt first.
In order of how soon they come due, with short-term debt first.
CONCEPT
Standardizing Financial Statements
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22
Consider the following information:
Total current assets
$51,787
Deferred income taxes
$1,242
Inventories
$3,485
Prepaid expenses
$1,116
Other assets
$4,148
Total current liabilities
$42,191
What is the current ratio?
1.14
0.87
1.23
0.81
CONCEPT
Liquidity Ratios
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23
The purpose of finance is to .
make as much money as possible over the long-term
create maximum value through informed resource decisions
understand how and why markets change
eliminate all risk and uncertainty when it comes to investing assets
CONCEPT
Introducing Finance
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24
Which method of depreciation calculation most likely gives a company the greatest tax benefit the soonest?
Activity-based
Straight line
Declining balance
Salvage
CONCEPT
Tax Considerations
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25
If total assets are $325 million and net income is $40 million, then the ROA is .
12%
20.25%
incalculable without total revenue data
incalculable without EBIT data
CONCEPT
Profitability Ratios
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26
If Company A takes a higher level of financial risk than Company B, then Company A is likely to have
than Company B.
a lower debt ratio
a higher debt ratio
more financial flexibility
a greater ability to borrow
CONCEPT
Debt Management Ratios
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