1. The form of organization for a business is not an important issue, as this decision has very little effect on the income and wealth of the firm's owners. T/F false

2.The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both offer their owners limited liability, whereas proprietorships do not. T/F false

3. Which of the following statements is CORRECT?

A) One of the disadvantages of incorporating a business is that the owners then become subject to liabilities in the event the firm goes bankrupt.

B) Sole proprietorships are subject to more regulations than corporations.

C) In any type of partnership, every partner has the same rights, privileges, and liability exposure as every other partner.

D) Sole proprietorships and partnerships generally have a tax advantage over many corporations, especially large ones.

E) Corporations of all types are subject to the corporate income tax.

4. Which of the following statements is CORRECT?

A) One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability.

B) It is generally easier to transfer one s ownership interest in a partnership than in a corporation.

C) One of the advantages of the corporate form of organization is that it avoids double taxation.

D) One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., one person, one vote.

E) Corporations of all types are subject to the corporate income tax.

5. One drawback of switching from a partnership to the corporate form of organization is the following:

A) It subjects the firm to additional regulations.

B) It cannot affect the amount of the firm's operating income that goes to taxes.

C) It makes it more difficult for the firm to raise additional capital.

D) It makes the firm s investors subject to greater potential personal liabilities.

E) It makes it more difficult for the firm s investors to transfer their ownership interests.

6. Which of the following statements is CORRECT?

A) A hostile takeover is the main method of transferring ownership interest in a corporation.

B) Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization.

C) A corporation is a legal entity that is generally created by a state, and it has a life and existence that is separate from the lives of its individual owners and managers.

D) Limited liability of its stockholders is an advantage of the corporate form of organization, but corporations have more trouble raising money in financial markets because of the complexity of this form of organization.

E) Although its stockholders are insulated by limited legal liability, the legal status of the corporation does not protect the firm s managers in the same way, i.e., bondholders can sue its managers if the firm defaults on its debt, even if the default is the result of poor economic conditions.

7. Which of the following statements is NOT CORRECT?

A) A time line is meaningful only if all cash flows occur annually.

B) Time lines are useful for visualizing complex problems prior to doing actual calculations.

C) Time lines can be constructed even in situations where some of the cash flows occur annually but others occur quarterly.

D) Time lines can be constructed for annuities where the payments occur at either the beginning or the end of periods.

E) The cash flows shown on a time line can be in the form of annuity payments, but they can also be uneven amounts.

8. Which of the following statements is CORRECT?

A) A time line is not meaningful unless all cash flows occur annually.

B) Time lines are useful for visualizing complex problems prior to doing actual calculations.

C) Time lines cannot be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.

D) Time lines can only be constructed for annuities where the payments occur at the ends of the periods, i.e., for ordinary annuities.

E) Time lines cannot be constructed where some of the payments constitute an annuity but others are unequal and thus are not part of the annuity.

9. You are analyzing the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?

A) The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.

B) The discount rate increases.

C) The riskiness of the investment s cash flows decreases.

D) The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.

E) The discount rate decreases.

10. Which of the following statements is CORRECT?

A) The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.

B) If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.

C) The cash flows for an annuity due must all occur at the ends of the periods.

D) The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.

E) If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.

11. Which of the following statements is CORRECT?

A) If you have a series of cash flows, all of which are positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.

B) If you have a series of cash flows, and CF0 is negative but all of the other CFs are positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.

C) To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise.

D) If you solve for I and get a negative number, then you must have made a mistake.

E) If CF0 is positive and all the other CFs are negative, then you cannot solve for I.

12. Which of the following bank accounts has the highest effective annual return?

A) An account that pays 8% nominal interest with monthly compounding.

B) An account that pays 8% nominal interest with annual compounding.

C) An account that pays 7% nominal interest with daily (365-day) compounding.

D) An account that pays 7% nominal interest with monthly compounding.

E) An account that pays 8% nominal interest with daily (365-day) compounding.

13. The annual report contains four basic financial statements: the income statement, balance sheet, statement of cash flows, and statement of retained earnings. T/F true

14. The primary reason the annual report is important in finance is that it is used by investors when they form expectations about the firm's future earnings and dividends, and the riskiness of those cash flows. T/F true

15. Which of the following statements is CORRECT?

A) The four most important financial statements provided in the annual report are the balance sheet, income statement, cash budget, and the statement of retained earnings.

B) The balance sheet gives us a picture of the firm s financial position at a point in time.

C) The income statement gives us a picture of the firm s financial position at a point in time.

D) The statement of cash flows tells us how much cash the firm has in the form of currency and demand deposits.

E) The statement of cash needs tells us how much cash the firm will require during some future period, generally a month or a year.

16. Which of the following statements is CORRECT?

A) The balance sheet for a given year, say 2006, is designed to give us an idea of what happened to the firm during that year.

B) The balance sheet for a given year, say 2006, tells us how much money the company earned during that year.

C) The difference between the total assets reported on the balance sheet and the debts reported on this statement tells us the current market value of the stockholders' equity, assuming the statements are prepared in accordance with generally accepted accounting principles (GAAP).

D) For most companies, the market value of the stock equals the book value of the stock as reported on the balance sheet.

E) A typical industrial company s balance sheet lists the firm's assets that will be converted to cash first, and then goes on down to list the firm's longest lived assets last.

17. Its retained earnings are the actual cash that the firm has generated through operations less the cash that has been paid out to stockholders as dividends. Retained earnings are kept in cash or near cash accounts and, thus, these cash accounts, when added together, will always be equal to the firm's total retained earnings. T/F false

18. The retained earnings account on the balance sheet does not represent cash. Rather, it represents part of stockholders' claims against the firm's existing assets. This implies that retained earnings are, in fact, stockholders' reinvested earnings. T/F true

19. Considered alone, which of the following would increase a company s current ratio?

A) An increase in net fixed assets.

B) An increase in accrued liabilities.

C) An increase in notes payable.

D) An increase in accounts receivable.

E) An increase in accounts payable.

20. Which one of the following would, generally, indicate an improvement in a company s financial position, holding other things constant?

A) The TIE declines.

B) The DSO increases.

C) The EBITDA coverage ratio increases.

D) The current and quick ratios both decline.

E) The total assets turnover decreases.

21. A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?

A) Reduce the company s days sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.

B) Use cash to repurchase some of the company s own stock.

C) Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.

D) Issue new stock and then use some of the proceeds to purchase additional inventory and hold the remainder as cash.

E) Use cash to increase inventory holdings.

22. Which of the following statements is CORRECT?

A) A reduction in inventories held would have no effect on the current ratio.

B) An increase in inventories would have no effect on the current ratio.

C) If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will increase.

D) A reduction in the inventory turnover ratio will generally lead to an increase in the ROE.

E) If a firm increases its sales while holding its inventories constant, then, other things held constant, its inventory turnover ratio will decrease.

23. Amram Company s current ratio is 1.9. Considered alone, which of the following actions would reduce the company s current ratio?

A) Borrow using short-term notes payable and use the proceeds to reduce accruals.

B) Borrow using short-term notes payable and use the proceeds to reduce long-term debt.

C) Use cash to reduce accruals.

D) Use cash to reduce short-term notes payable.

E) Use cash to reduce accounts payable.

24. Which of the following statements is CORRECT?

A) If a security analyst saw that a firm s days sales outstanding (DSO) was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign of strength.

B) If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days sales outstanding (DSO) will increase.

C) There is no relationship between the days sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things.

D) A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.

E) If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days sales outstanding will decline.