Part I. True or False 1) Financial management deals with the maintenance and creation of economic value or wealth. 2) Each financial decision made by a corporate manager can be evaluated by its direct impact on the corporation's stock price. 3) The fundamental goal of a business is to maximize the retained earnings available to the corporation's shareholders. 4) Shareholder wealth maximization means maximizing the price of the existing common stock. 5) It is important to evaluate a corporate manager's financial decision by measuring the effect the decision should have on the corporation's stock price if everything else were held constant. 6) Common stock is considered a short-term security because it has no maturity date and a long-term security is one with a maturity date of more than one year. 7) Saving surplus units include individuals and governments, but not corporations. 8) Individuals, corporations, and governments can be either savings deficit units or savings surplus units. 9) A corporation needing cash sells securities to investors in the secondary market. 10) Part of the U.S. Government's huge deficit is financed by foreign countries, such as China, which is a savings surplus unit. 11) The money market includes transactions in short-term financial instruments. 12) Over-the-counter markets include all security markets, with the exception of organized exchanges. 13) For a firm to have its securities listed on an exchange, it must meet certain requirements. These usually include measures of profitability, size, market value, and public ownership. 14) The vast majority of corporate bond business takes place over the counter. 15) Financial markets exist in order to allocate savings in the economy to the demanders of those savings. 16) An income statement reports a firm's cumulative revenues and expenses from the inception of the firm through the income statement date. 17) Owners equity increases each period by the amount of the corporation's positive net cash flow. 18) If two companies have the same revenues and operating expenses, their net incomes will still be different if one company finances its assets with more debt and the other company with more equity. 19) Common-sized income statements are used to compare companies that have the same amount of revenues. 20) Common-sized income statements restate the numbers in the income statement as a percentage of sales to assist in the comparison of a firm's financial performance across time and with competitors. 21) When the present financial ratios of a firm are compared with similar ratios for another firm in the same industry it is called trend analysis. 22) Ratio analysis enhances our understanding of three basic attributes of performance: liquidity, profitability, and the ability to create shareholder value. 23) Theoretically, market values of assets are better for evaluating the creation of shareholder wealth than accounting numbers, but accounting numbers are used because they are more readily available. 24) Financial ratios are often reported by industry or line of business because differences in the type of business can make ratio comparisons uninformative or even misleading. 25) Financial ratios are useful for evaluating performance but should not be used for making financial projections. 26) Financial ratios are useful for measuring performance because maximizing the return on equity for common shareholders is the primary goal of financial managers. Keywords: Ratio Analysis, Goal of the Firm, ROE AACSB: Reflective thinking skills 27) If company A has a lower average collection period than company B, then company A will have a higher accounts receivable turnover. 28) Net income is the best measure to use for evaluating a firm's profits on assets because it includes the effect of financing as well as the effect of operations. 29) Operating profits or EBIT is used to measure a firm's profits on assets because it does not include the firm's cost of debt financing. Keywords: Operating Profits, Asset Management AACSB: Reflective thinking skills 30) Operating return on assets (OROA) is equal to operating profit margin times total asset turnover. 31) Lower asset turnover ratios are generally indicative of more efficient asset management. 32) A high debt ratio can be favorable because higher leverage may result in a higher return on equity. Part II Multiple Choice 1) Money market instruments include: A) common stock. B) preferred stock. C) T-bonds. D) T-bills. 2) ExxonMobil generates about $50 billion in cash annually from its operations and invests about half of that on new exploration. Therefore, ExxonMobil is an example of a(n): A) savings surplus unit. B) savings deficit unit. C) investment banker. D) financial intermediary. 3) Three ways that savings can be transferred through the financial markets include all of the following except: A) direct transfer of funds. B) indirect transfer using the investment banker. C) indirect transfer using the venture capital firm. D) indirect transfer using the financial intermediary. 4) A wealthy private investor providing a direct transfer of funds is called A) a venture capitalist. B) an investment banker. C) a financial intermediary. D) an angel investor. 5) Common examples of financial intermediaries include all of the following except: A) Venture Capital Firms. B) Life Insurance Companies. C) Pension Funds. D) Mutual Funds. 6) The basic format of an income statement is A) Sales - Expenses = Profits. B) Income - Expenses = EBIT. C) Sales - Liabilities = Profits. D) Assets - Liabilities = Profits. 7) Li Retailing reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Li's gross profit is equal to A) $770,000. B) $1,070,000. C) $1,100,000. D) $1,500,000. 8) Li Retailing reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Li's operating income is equal to A) $770,000. B) $1,070,000. C) $1,100,000. D) $1,500,000. 9) Li Retailing reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Li's net profit margin is equal to A) 25.67%. B) 35.67%. C) 36.67%. D) 50.00%. 10) Li Retailing reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000; Li's operating profit margin is equal to A) 25.67% B) 35.67% C) 36.67% D) 50.00% 11) Asset efficiency ratios for Fischer, Inc. are given in the table below. Based on this information, Fischer, Inc.'s fixed asset turnover ratio is likely to be ________. Fischer, Inc. Peer Group Total Asset Turnover 1.58X 2.05X Accounts Receivable Turnover 17.55X 14.35X Inventory Turnover 6.34X 5.22X Fixed Asset Turnover ????? 3.50X A) equal to 3.50 B) less than 3.50 C) greater than 3.50 D) negative 12) An analyst is evaluating two companies, A and B. Company A has a debt ratio of 50% and Company B has a debt ratio of 25%. In his report, the analyst is concerned about Company B's debt level, but not about Company A's debt level. Which of the following would best explain this position? A) Company B has much higher operating income than Company A B) Company A has a lower times interest earned ratio and thus the analyst is not worried about the amount of debt C) Company B has a higher operating return on assets than Company A, but Company A has a higher return on equity than Company B D) Company B has more total assets than Company A 13) Smith Corporation has earned a return on capital invested of 10% for the past two years, but an investment analyst reviewing the company has stated the company is not creating shareholder value. This may be due to the fact that A) the risk free rate of interest is 3% B) the corporation's inventory turnover is high C) investors' required rate of return is 8% D) investors' required rate of return is 12% 14) In an ideal world, which of the following would be used to evaluate firm performance? A) book value of assets B) corporate retained earnings from the day of incorporation C) accounting assets and profits D) market value of assets 15) All of the following measure liquidity except: A) current ratio. B) inventory turnover. C) acid-test ratio. D) operating return on assets. 16) Baker Corp. is required by a debt agreement to maintain a current ratio of at least 2.5, and Baker's current ratio now is 3. Baker wants to purchase additional inventory for its upcoming Christmas season, and will pay for the inventory with short-term debt. How much inventory can Baker purchase without violating its debt agreement if their total current assets equal $15 million? A) $0.50 million B) $1.67 million C) $4.50 million D) $6.00 million 17) Williams Inc. has a current ratio equal to 3, a quick ratio equal to 1.8, and total current assets of $6 million. William's inventory balance is A) $2,000,000. B) $2,400,000. C) $4,000,000. D) $4,800,000. 18) Jones, Inc. has a current ratio equal to 1.40. Which of the following transactions will increase the company's current ratio? A) The company collects $500,000 of its accounts receivable B) The company sells $1 million of inventory on credit C) The company pays back $50,000 of its long-term debt D) The company writes a $30,000 check to pay off some existing accounts payable 19) For a retailer with inventory to sell, the acid-test ratio will be A) less than the current ratio, thus providing a more stringent measure of liquidity. B) greater than the current ratio, thus providing a more stringent measure of liquidity. C) greater than the current ratio, thus providing a less stringent measure of liquidity. D) unimportant because it doesn't include inventory