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Homework I Solutions - Introduction to Corporate Finance | COB 300, Assignments of Introduction to Business Management

Material Type: Assignment; Professor: Marshall; Class: INTEGRATED FUNC SYS:MKTG; Subject: College of Business; University: James Madison University; Term: Unknown 1989;

Typology: Assignments

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Dr. Marshall Finance COB 300
Chapter 1 Homework Solutions
Chapter 1 - Introduction to Corporate Finance KEY
Created: 7:19:34 AM EDT
1. The person generally directly responsible for overseeing the tax management, cost accounting,
financial accounting, and data processing functions is the:
a. treasurer.
b. director
.
C controller.
d. chairman of the board.
e. chief executive officer.
2. The person generally directly responsible for overseeing the cash and credit functions, financial
planning, and capital expenditures is the:
A treasurer.
b. director
.
c. controller.
d. chairman of the board.
e. chief operations officer.
3. The process of planning and managing a firm's long-term investments is called:
a. working capital
management.
b. financial depreciation.
c. agency cost analysis.
D capital budgeting.
e. capital structure.
4. The mixture of debt and equity used by a firm to finance its operations is called:
a. working capital
management.
b. financial depreciation.
c. cost analysis.
d. capital budgeting.
E capital structure.
5. The management of a firm's short-term assets and liabilities is called:
A working capital
management.
b. debt management.
c. equity management.
d. capital budgeting.
e. capital structure.
6. The rules by which corporations govern themselves are called:
a. indenture provisions.
b. indemnity provisions.
c. charter agreements.
COB 300B: Finance Chapter 1
Online Homework Fall 2006
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Dr. Marshall Finance COB 300

Chapter 1 Homework Solutions

Chapter 1 - Introduction to Corporate Finance KEY

Created: 7:19:34 AM EDT

  1. The person generally directly responsible for overseeing the tax management, cost accounting, financial accounting, and data processing functions is the: a. treasurer. b. director . C controller. d. chairman of the board. e. chief executive officer.
  2. The person generally directly responsible for overseeing the cash and credit functions, financial planning, and capital expenditures is the: A treasurer. b. director . c. controller. d. chairman of the board. e. chief operations officer.
  3. The process of planning and managing a firm's long-term investments is called: a. working capital management. b. financial depreciation. c. agency cost analysis. D capital budgeting. e. capital structure.
  4. The mixture of debt and equity used by a firm to finance its operations is called: a. working capital management. b. financial depreciation. c. cost analysis. d. capital budgeting. E capital structure.
  5. The management of a firm's short-term assets and liabilities is called: A working capital management. b. debt management. c. equity management. d. capital budgeting. e. capital structure.
  6. The rules by which corporations govern themselves are called: a. indenture provisions. b. indemnity provisions. c. charter agreements. COB 300B: Finance Chapter 1

D bylaws. e. articles of incorporation.

  1. A business entity operated and taxed like a partnership, but with limited liability for the owners, is called a: A limited liability company. b. general partnership. c. limited proprietorship. d. sole proprietorship. e. corporation.
  2. A conflict of interest between the stockholders and management of a firm is called: a. stockholders' liability. b. corporate breakdown. C the agency problem. d. corporate activism. e. legal liability.
  3. Agency costs refer to: a. the total dividends paid to stockholders over the lifetime of a firm. b. the costs that result from default and bankruptcy of a firm. c. corporate income subject to double taxation. D the costs of any conflicts of interest between stockholders and management. e. the total interest paid to creditors over the lifetime of the firm.
  4. A stakeholder is: a. any person or entity that owns shares of stock of a corporation. b. any person or entity that has voting rights based on stock ownership of a corporation. c. a person who initially started a firm and currently has management control over the cash flows of the firm due to his/her current ownership of company stock. d. a creditor to whom the firm currently owes money and who consequently has a claim on the cash flows of the firm. E any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of the firm.
  5. The original sale of securities by governments and corporations to the general public occurs in the: A primary market. b. secondary market. c. private placement market. d. proprietary market. e. liquidation market.
  6. When one shareholder sells stock directly to another the transaction is said to occur in the: a. dealer market. b. primary COB 300B: Finance Chapter 1
  1. The articles of incorporation: a. can be used to remove company management. b. are amended annually by the company stockholders. C set forth the number of shares of stock that can be issued. d. set forth the rules by which the corporation regulates its existence. e. can set forth the conditions under which the firm can avoid double taxation.
  2. Which one of the following business types is best suited to raising large amounts of capital? a. sole proprietorship b. limited liability company C corporation d. general partnership e. limited partnership
  3. Which type of business organization has all the respective rights and privileges of a legal person? a. sole proprietorship b. general partnership c. limited partnership D corporation e. limited liability company
  4. The decisions made by financial managers should all be ones which increase the: a. size of the firm. b. growth rate of the firm. c. marketability of the managers. D market value of the existing owners' equity. e. financial distress of the firm.
  5. Which one of the following actions by a financial manager creates an agency problem? a. refusing to borrow money when doing so will create losses for the firm b. refusing to lower selling prices if doing so will reduce the net profits C agreeing to expand the company at the expense of stockholders' value d. agreeing to pay bonuses based on the market value of the company stock e. increasing current costs in order to increase the market value of the stockholders' equity
  6. Which form of business structure faces the greatest agency problems? a. sole proprietorship b. general partnership c. limited partnership D corporation e. limited liability company
  7. Which one of the following parties is considered a stakeholder of a firm? A employee b. short-term creditor c. long-term creditor d. preferred stockholder COB 300B: Finance Chapter 1

e. common stockholder

  1. Which one of the following is a primary market transaction? a. a dealer selling shares of stock to an individual investor B a dealer buying newly issued shares of stock from a corporation c. an individual investor selling shares of stock to another individual d. a bank selling shares of a medical firm to an individual e. a sole proprietor buying shares of stock from an individual investor COB 300B: Finance Chapter 1
  1. The capital structure weights used in computing the weighted average cost of capital are: a. constant over time provided that the debt-equity ratio changes in unison with the market values. b. based on the face value of the firm's debt. c. computed using the book value of the long-term debt and the shareholder's equity. D based on the market value of the firm's debt and equity securities. e. limited to the firm's debt and common stock.
  2. The weighted average cost of capital for a firm is the: a. discount rate which the firm should apply to all of the projects it undertakes. B overall rate which the firm must earn on its existing assets to maintain the value of its stock. c. rate the firm should expect to pay on its next bond issue. d. maximum rate which the firm should require on any projects it undertakes. e. rate of return that the firm's preferred stockholders should expect to earn over the long term.
  3. The equity risk derived from a firm's operating activities is called _____ risk. a. market b. systematic c. extrinsic D business e. financial
  4. The equity risk derived from a firm's capital structure policy is called _____ risk. a. market b. systematic c. extrinsic d. business E financial
  5. The tax savings of the firm derived from the deductibility of interest expense is called the: A interest tax shield. b. depreciable basis. c. financing umbrella. d. current yield. e. tax-loss carryforward savings.
  6. The unlevered cost of capital is: a. the cost of capital for a firm with no equity in its capital structure. B the cost of capital for a firm with no debt in its capital structure. c. the interest tax shield times pretax net income. d. the cost of preferred stock for a firm with equal parts debt and common stock in its capital structure. e. equal to the profit margin for a firm with some debt in its capital structure.
  7. A firm should select the capital structure which: a. produces the highest cost of capital. B maximizes the value of the firm. c. minimizes taxes. d. is fully unlevered. e. has no debt.
  8. The value of a firm is maximized when the: a. cost of equity is maximized. b. tax rate is zero. c. levered cost of capital is maximized. D weighted average cost of capital is minimized. e. debt-equity ratio is minimized. COB 300B: Finance Chapter 1
  1. The optimal capital structure has been achieved when the: a. debt-equity ratio is equal to 1. b. weight of equity is equal to the weight of debt. c. cost of equity is maximized given a pre-tax cost of debt. d. debt-equity ratio is such that the cost of debt exceeds the cost of equity. E debt-equity ratio selected results in the lowest possible weighed average cost of capital.
  2. The business risk of a firm: a. depends on the level of unsystematic risk associated with the assets of the firm. b. is inversely related to the required return on the firm's assets. c. is dependent upon the relative weights of the debt and equity used to finance the firm. D has a positive relationship with the cost of equity for that firm. e. has no relationship with the required return on a firm's assets according to M and M Proposition II.
  3. The interest tax shield is a key reason why: a. the required rate of return on assets rises when debt is added to the capital structure. b. the value of an unlevered firm is equal to the value of a levered firm. C the net cost of debt to a firm is generally less than the cost of equity. d. the cost of debt is equal to the cost of equity for a levered firm. e. firms prefer equity financing over debt financing.
  4. Corporations in the U.S. tend to: a. minimize taxes. B underutilize debt. c. rely less on equity financing than they should. d. have extremely high debt-equity ratios. e. rely more heavily on bonds than stocks as the major source of financing.
  5. In general, the capital structures used by U.S. firms: a. tend to overweigh debt in relation to equity. b. are easily explained in terms of earnings volatility. c. are easily explained by analyzing the types of assets owned by the various firms. d. tend to be those which maximize the use of the firm's available tax shelters. E vary significantly across industries. COB 300B: Finance Chapter 1
  1. The financial statement summarizing a firm's results of operations (performance) over a period of time is the: A income statement. b. balance sheet. c. statement of cash flows. d. tax reconciliation statement. e. shareholders' equity sheet.
  2. Your _____ tax rate is the amount of tax payable on the next taxable dollar you earn. a. deductible b. residual c. total d. average E marginal
  3. _____ refers to the cash flow that results from the firm's ongoing, normal business activities. A Operating cash flow b. Capital spending c. Net working capital d. Cash flow from assets e. Cash flow to creditors
  4. _____ refers to the net expenditures by the firm on fixed asset purchases. a. Operating cash flow B Capital spending c. Net working capital d. Cash flow from assets e. Cash flow to creditors
  5. _____ refers to the difference between a firm's current assets and its current liabilities. a. Operating cash flow b. Capital spending C Net working capital d. Cash flow from assets e. Cash flow to creditors
  6. _____ refers to the net total cash flow of the firm available for distribution to its creditors and stockholders. a. Operating cash flow b. Capital spending c. Net working capital D Free cash flow (cash flow from assets) COB 300B: Finance Chapter 1

e. Cash flow to creditors

  1. Earnings per share is equal to: A net income divided by the total number of shares outstanding. b. net income divided by the par value of the common stock. c. gross income multiplied by the par value of the common stock. d. operating income divided by the par value of the common stock. e. net income divided by total shareholders' equity.
  2. A computer used in a business office by the office manager is classified as: a. a current asset. b. an intangible asset. c. net working capital. D a tangible asset. e. an inventory item.
  3. Which of the following are included in current assets? I. equipment II. inventory III. accounts payable IV. cash A II and IV only b. I and III only c. I, II, and IV only d. III and IV only e. II, III, and IV only
  4. Which of the following are included in current liabilities? I. note payable to a supplier in eighteen months II. debt payable to a mortgage company in nine months III. accounts payable to suppliers IV. loan payable to the bank in fourteen months a. I and III only B II and III only c. III and IV only d. II, III, and IV only e. I, II, and III only
  5. Which one of the following statements concerning net working capital is correct? A The greater the net working capital, the greater the ability of a firm to meet its short-term obligations. b. The change in net working capital is equal to current assets minus current liabilities. c. Depreciation must be added back to current assets when computing the change in net working capital. COB 300B: Finance Chapter 1

c. depreciation is shown as an expense but does not affect the taxes payable. D depreciation reduces both the taxable income and the net income. e. interest expense is added to earnings before interest and taxes to get taxable income.

  1. According to Generally Accepted Accounting Principles, costs are: a. recorded as incurred. b. recorded when paid. C matched with revenues. d. matched with production levels. e. expensed as management desires.
  2. Depreciation: A is a noncash expense that is recorded on the income statement. b. increases the net fixed assets as shown on the balance sheet. c. reduces both the net fixed assets and the costs of a firm. d. is a non-cash expense which increases the net operating income. e. decreases net fixed assets, net income, and operating cash flows.
  3. When you are making a financial decision, the most relevant tax rate is the _____ rate. a. average b. fixed C marginal d. total e. Variable
  4. A firm has $300 in inventory, $600 in fixed assets, $200 in accounts receivables, $100 in accounts payable, and $50 in cash. What is the amount of the current assets? a. $ B $ c. $ d. $1, e. $1,
  5. A firm has net working capital of $350. Long-term debt is $600, total assets are $950 and fixed assets are $400. What is the amount of the total liabilities? a. $ b. $ c. $ D $ e. $1,
  6. The total assets are $900, the fixed assets are $600, long-term debt is $500, and short-term debt is $200. What is the amount of net working capital? a. $ B $ c. $ COB 300B: Finance Chapter 1

Chapter 4: Long-Term Financial Planning and Growth KEY

Created: 3:29:41 PM EDT

  1. Pro forma financial statements are: a. statements recapping the performance of a firm for the past five years. b. accounting statements filed with the Securities and Exchange Commission. c. accounting statements filed with the Internal Revenue Service. D projected accounting statements based on a sales forecast. e. the most-recently compiled accounting statements of a firm.
  2. The financial planning method in which accounts vary depending on a firm's predicted sales level is called the _____ approach. A percentage of sales b. sales dilution c. sales reconciliation d. common-size e. time-trend
  3. The dividend payout ratio is calculated as: a. net income minus additions to retained earnings. b. cash dividends divided by the change in retained earnings. C cash dividends divided by net income. d. net income minus cash dividends. e. one plus the retention ratio.
  4. The retention ratio is calculated as: a. one plus the dividend payout ratio. B the additions to retained earnings divided by net income. c. the additions to retained earnings divided by dividends paid. d. net income minus additions to retained earnings. e. net income minus cash dividends.
  5. The internal growth rate of a firm is best described as the: a. minimum growth rate achievable if the firm does not pay out any cash dividends. b. minimum growth rate achievable if the firm maintains a constant equity multiplier. C maximum growth rate achievable without external financing of any kind. d. maximum growth rate achievable without using any external equity financing, and while maintaining a constant debt-equity ratio. e. maximum growth rate achievable without any limits on the level of debt financing.
  6. The sustainable growth rate of a firm is best described as the: a. minimum growth rate achievable if the firm does not pay out any cash dividends. b. minimum growth rate achievable if the firm maintains a constant equity multiplier. c. maximum growth rate achievable without external financing of any kind. D maximum growth rate achievable without using any external equity financing, and while maintaining a constant debt-equity ratio. e. maximum growth rate achievable without any limits on the level of debt financing. COB 300B: Finance Chapter 1
  1. Which of the following are basic elements of financial planning for a corporation? I. dividend policy II. net working capital decision III. capital budgeting decision IV. capital structure policy a. I and IV only b. II and III only c. I, III, and IV only d. II, III,and IV only E I, II, III, and IV
  2. Financial planning: a. encourages managers to separate their goals from their plans. b. is generally based solely on the best-case scenario. c. generally has been found ineffective. D helps managers establish priorities. e. prevents firms from encountering surprise events.
  3. When constructing a pro forma statement, net working capital generally varies: A directly with sales. b. with the level of capacity utilization. c. directly with the growth rate of fixed assets. d. based upon the financial leverage employed. e. as necessary to get the balance sheet to balance.
  4. When fixed assets on a pro forma statement are projected to increase at a rate equivalent to the projected rate of sales growth, it can be assumed that the firm is: a. projected to grow at the internal rate of growth. b. projected to grow at the sustainable rate of growth. c. creating excess capacity. D currently operating at full capacity. e. retaining all of its projected net income.
  5. The composition of the liability and equity sections of a pro forma statement depend most heavily on a firm's: a. net working capital policies. B financing and dividend policies. c. desired level of liquidity. d. capital budgeting and working capital policies. e. level of capacity utilization and net working capital policy.
  6. By compiling pro forma statements, firms can: a. ensure that their anticipated rate of growth will in fact occur. COB 300B: Finance Chapter 1

e. the debt ratio.

  1. One of the primary advantages of financial planning is that it: a. concentrates solely on short-term profits. B reconciles planned activities with company priorities. c. establishes the highest possible growth rate at any cost. d. limits expansion to the maximum achievable internal rate of growth. e. eliminates future surprises and unplanned activities.
  2. One of the primary weaknesses of many financial planning models is that they: a. rely too much on financial relationships and too little on accounting relationships. b. are iterative in nature. c. ignore the goals and objectives of senior management. d. are based solely on best case assumptions. E ignore the size, risk, and timing of cash flows.
  3. Financial planning, when properly executed, a. ignores the normal restraints encountered by a firm. b. ensures that the primary goals of senior management are fully achieved. c. reduces the necessity of daily management oversight of the business operations. D helps ensure that proper financing is in place to support the desired level of growth. e. eliminates the need to plan more than one year in advance. COB 300B: Finance Chapter 1