Midterm Quiz

Question 1

A conflict of interest between the "stockholders and management" of a firm is referred to as the:
A. stockholders' liability.
B. corporate breakdown.
C. agency problem.
D. legal liability.
E. corporate activism.

Answer 1

agency problem/principal agent problem
-> increase agency cost

principal: shareholder, agent: manager

Question 2

The “primary goal of financial management” is to:
A. minimize operational costs and maximize firm efficiency.
B. maximize the current value per share of the existing stock.
C. maintain steady growth in both sales and net earnings.
D. avoid financial distress.
E. maximize current dividends per share of the existing stock.

Answer 2

maximize the current “value” per share of the existing “stock”. (value, not dividend)

Question 3

The ultimate "control of a corporation" lies in the hands of the corporate:
A. stockholders.
B. president.
C. board of directors.
D. chief executive officer.
E. chairman of the board.

Answer 3

stockholders

Question 4

The process of planning and managing a firm's "long-term assets" is called:
A. financial depreciation.
B. working capital management.
C. capital budgeting.
D. capital structure.
E. agency cost analysis.

Answer 4

capital budgeting

Question 5

Which one of the following functions should be the responsibility of the controller rather than the treasurer?
A. daily cash deposit
B. income tax returns
C. equipment purchase analysis
D. customer credit approval
E. payment to a vendor

Answer 5

income tax returns

treasure: prepare financial st.
controller: prepare financial st., auditing (internal accounting), taxes

Question 6

The treasurer and the controller of a corporation generally report to the
A) president.
B) board of directors.
C) chief executive officer.
D) chief financial officer.
E) chairman of the board.

Answer 6

chief financial officer

Question 7

Agency costs refer to:
A) corporate income subject to double taxation.
B) the total dividends paid to stockholders over the lifetime of a firm.
C) the total interest paid to creditors over the lifetime of the firm.
D) the costs that result from default and bankruptcy of a firm.
E) the costs of any conflicts of interest between stockholders and management.

Answer 7

E) the costs of any conflicts of interest between stockholders and management.

Question 8

Which one of the following statements is correct concerning the organizational structure of a corporation?
A) The controller reports to the president.
B) The controller reports to the chief financial officer.
C) The board of directors reports to the corporate president.
D) The vice president of finance reports to the chairman of the board.
E) The treasurer reports to the chief executive officer.

Answer 8

B) The controller reports to the chief financial officer.

Question 9

The cash flow resulting from a firm’s ongoing, normal business activities is referred to as the

Answer 9

operating cash flow

Question 10

Net working capital is defined as

Answer 10

current assets minus current liabilities

Question 11

Which one of the following statements concerning liquidity is correct?

Answer 11

Balance sheet accounts are listed in order of decreasing liquidity.

Question 12

An asset that can be quickly converted into cash without significant loss in value is referred to as being

Answer 12

liquid

Question 13

If a firm produces a return on assets of 15 percent and also a return on equity of 15 percent, then the firm

Answer 13

has no debt of any kind

Question 14

The financial ratio days’ sales in inventory is measured as

Answer 14

365 days divided by the inventory turnover

Question 15

A public firm’s market capitalization is equal to the

Answer 15

price per share multiplied by number of shares outstanding

Question 16

An annuity stream of cash flow payments is a set of

Answer 16

equal cash flows occurring each time period over a fixed length of time

Question 17

A flow of unending and equal payments that occur at regular intervals of time is called a(n)

Answer 17

perpetuity

Question 18

The net present value of a project is equal to the

Answer 18

present value of the future cash flows minus the initial cost

Question 19

A perpetuity differs from an annuity because

Answer 19

perpetuity payments never cease

Question 20

All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate.

Answer 20

a discount; greater than