Question 1. Insider trading occurs when A. corporate officers buy stock in their company. B. lawyers, investment bankers, and others buy common stock in companies represented by their firms. C. someone has information not available to the public which they use to profit from trading in stocks. D. any stock transactions occur in violation of the Federal Trade Commissions restrictions on monopolies. 2) Regarding risk levels, financial managers should A. avoid higher risk projects because they destroy value B. focus primarily on market fluctuations C. pursue higher risk projects because they increase value D. evaluate investor’s desire for risk 3) Maximization of shareholder wealth is a concept in which A. increased earnings is of primary importance. B. profits are maximized on a quarterly basis. C. virtually all earnings are paid as dividends to common stockholders. D. optimally increasing the long-term value of the firm is emphasized. 4) An increase in investments in long-term securities will: A. increase cash flow from investing activities. B. decrease cash flow from investing activities. C. increase cash flow from financing activities. D. decrease cash flow from financing activities. 5) Which of the following would represent a use of funds and, indirectly, a reduction in cash balances? A. an increase in inventories B. the sale of new bonds by the firm C. a decrease in marketable securities D. an increase in accounts payable 6) Which of the following is not a primary source of capital to the firm? A. assets B. bonds C. common stock D. preferred stock 7) If a firm has both interest expense and lease payments, A. times interest earned will be smaller than fixed charge coverage. B. fixed charge coverage cannot be computed. C. times interest earned will be greater than fixed charge coverage. D. times interest earned will be the same as fixed charge coverage. 8) In examining the liquidity ratios, the primary emphasis is the firm’s A. ability to effectively employ its resources. B. ability to earn an adequate return. C. overall debt position. D. ability to pay short-term obligations on time. 9) For a given level of profitability as measured by profit margin, the firm’s return on equity will A. increase as its debt-to-assets ratio decreases. B. decrease as its times-interest-earned ratio decreases. C. decrease as its current ratio increases. D. increase as its debt-to assets ratio increases. MEGAFRAME COMPUTER COMPANY Balance Sheetas of 12/31/2006 Assets Cash $40,000 Accounts Receivable 60,000 Inventory 90,000 New Plant and Equipment 220,000 Total Assets $410,000 LIABILITY AND STOCKHOLDERS’ EQUITY Accounts Payable $60,000 Accrued Expenses 40,000 Long-Term Debt 130,000 Common Stock 60,000 Paid-In capita 20,000 Retained Earnings 100,000 Total Liabilities and Stockholders’ Equity $410,000 MEGAFRAME COMPUTER CO. Income Statement For the Year Ended 12/31/2006 Sales (all on credit) $720,000 Cost of Goods Sold 500,000 Gross Profit $220,000 Sales and Administrative Expense 20,000 Depreciation40,000 Operating Profit $160,000 Interest Expense 16,000 Profit before Taxes $144,000 Taxes (30%) 43,200 Net Income $100,800 10) Refer to the figure above. Megaframe’s current ratio is A. 1.9:1 B. 3.2:1 C. 1.625:1 D. 1.5:1 Tew Company Balance Sheet As of December 31, 2007 Assets Cash $20,000 A/R 80,000 Inventory 50,000 Net Plat & Equip. 250,000 Total Assets ————- $400,000 Liabilities and Stockholders’ Equity A/ P $40,000 Accrued Expenses 60,000 Long-Term debt 130,000 Common Stock100,000 Paid-In capital 10,000 Retained earnings 60,000 Total Liability and Stockholder equity————— $400,000 Tew Company Income Statement For the Year Ended Dec. 31, 2007 Sales (all on credit) $500,000 Cost of Goods Sold 200,000 Gross Profit 300,000 Sales & Admin. Expense 20,000 Fixed Lease Expenses 10,000 Depreciation40,000 Operating Profit 230,000 Interest Expense 20,000 Profit before Taxes 210,000 Taxes (35%) 73,500 Net Income 136,500 11) Refer t…
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