Chapter 6 - Practice problems

CHAPTER 6 – INTRODUCTION TO CORPORATE FINANCE 1. Which one of the following is a current liability? a. account receivable b. mortgage payable over thirty years c. account payable d. inventory e. retained earnings 2. Which of the following are components of stockholders' equity? I. common stock II. capital surplus III. long-term debt IV. retained earnings a. I and IV only b. I and II only c. II and III only d. II and IV only e. I, II, and IV only 3. An asset which _____ is defined as a liquid asset. a. cost less than its current value b. declines in value each year c. is used to manufacture a product d. has a physical presence e. is readily and easily converted to cash 4. An example of a liquidity ratio is _______. a. fixed asset turnover b. acid test or quick ratio c. current ratio d. A and C e. B and C 5. The financial records of Taylor and Daughter, show current assets of $850 and net fixed assets of $2,450. The firm has $700 in liabilities, which is the amount the firm would need to pay today to extinguish its debt. The firm estimates that it could sell its current assets for $800 and its fixed assets for $1,990. What is the market value of the stockholders' equity? a. $250 b. $800 c. $1,200 d. $2,090 e. $2,600 6. A firm's balance sheet shows current assets of $410, net fixed assets of $685, long-term debt of $320, and owners' equity of $590. What is the value of the firm's current liabilities? a. $35 b. $165 c. $185 d. $225 e. $825 7. A firm has cash of $15, accounts payable of $18, inventory of $102, net fixed assets of $147, accounts receivable of $31, and stockholder's equity of $87. The current assets equal _____ and the long-term debt is: a. $148; $187. b. $148; $190. c. $148; $208. d. $295; $190. 8. The _____ is a liquidity ratio. a. return on assets b. total asset turnover c. cash ratio d. times interest earned ratio e. profit margin 9. _____ ratios are designed to determine a firm's long-run ability to meet its obligations. a. Liquidity b. Asset turnover c. Profitability d. Financial leverage e. Market value 10. The total asset turnover ratio measures the: a. ability of the combined assets of a firm to generate sales. b. length of time it takes a firm to completely replace its fixed assets. c. amount of net income a firm generates per dollar of total assets. d. operating income per dollar of assets owned by a firm. e. amount of sales each dollar of fixed assets generates 11. If a firm uses cash to purchase inventory, its quick ratio will increase. a. True b. False 12. CatchaTan Co. had net sales of $750,000 over the past year. During that time, average receivables were $150,000. Assuming a 365-day year, what was the average collection period? a. 4 days b. 5 days c. 36 days d. 48 days e. 73 days 13. A firm has sales of $750, total assets of $400, and a debt-equity ratio of 1.50. If the return on equity is 10 percent, what is the firm's net income? a. $16 b. $20 c. $32 d. $40 14. Asset utilization ratios are intended to describe how efficiently a firm uses its assets to generate sales. a. True b. False 15. A firm has a return on equity of 15 percent, earnings before taxes of $30,000, a total asset turnover of.80, a profit margin of 4.5 percent, and a tax rate of 35 percent. What is the firm's return on assets? a. 3.6 percent b. 3.9 percent c. 5.7 percent d. 6.4 percent e. 9.3 percent 16. Under which of the following forms of business organization are the losses to an owner limited to the amount which he or she has invested in the organization? I. common stockholder II. limited partner III. general partner IV. sole proprietor a. I only b. I and II only c. I, II and IV only d. II, III and IV only 17. Which one of the following is an advantage enjoyed by a corporation but not by a sole proprietorship? unlimited liability for the firm's owners a. ease of company formation b. unlimited life of the company c. double taxation of profits d. separation of general and limited owners 18. Which one of the following is a true statement concerning a general partnership? a. General partners are not responsible for the debts of the partnership. b. General partners do not manage the partnership. c. The income from the partnership is taxed as personal income to the individual partners. d. A general partnership continues when one of the partners dies. e. Written partnership agreements are not recommended for general partnerships. 19. Which of the following statements is CORRECT? a. One drawback of forming a corporation is that it makes it more difficult for the firm to raise capital b. One drawback of forming a corporation is that it generally subjects the firm to additional regulations c. One disadvantage of forming a corporation is that this makes it more difficult for the firm's investors to transfer their ownership interests. d. None of the above 20. Three advantages of the corporation are the ease of transfer of ownership, limited liability for the shareholders and an unlimited life for the business entity a. True b. False