ECON 231 Economics Quiz

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Finance, log on to the if you know the answers to these and other questions, check out the study tools, and find out what topics require additional practice! Section 1.2 Does business finance include determining which long-term assets a firm should purchase? Section 1.3 Under what forms of organization does the owner have unlimited liability? Section 1.4 What is the intent of the Sarbanes-Oxley Act of 2002? Section 1.5 Who are the stakeholders in a firm? Section 1.6 What are the features of a dealer market? LO 1 1.1 LO 3 1.2 LO 3 LO 3 CRITICAL THINKING AND CONCEPTS REVIEW connect FINANCE The Financial Management Decision Process. What are the three types of financial management decisions? For each type of decision, give an example of a business transaction that would be relevant. Sole Proprietorships and Partnerships. What are the four primary disadvantages to the sole proprietorship and partnership forms of business organization? What benefits are there to these types of business organization as opposed to the corporate form? 1.3 Corporations. What is the primary disadvantage of the corporate form of organization? Name at least two of the advantages of corporate organization. 1.4 Corporate Finance Organization. In a large corporation, what are the two distinct groups that report to the chief financial officer? Which group is the focus of corporate finance? 1.5 Goal of Financial Management. What goal should always motivate the actions of the firm's financial manager? 1.6 Agency Problems. Who owns a corporation? Describe the process whereby the owners control the firm's management. What is the main reason that an agency relationship exists in the corporate form of organization? In this context, what kinds of problems can arise? Primary versus Secondary Markets. You've probably noticed coverage in the financial press of an initial public offering (IPO) of a company's securities. Social networking company Facebook is a relatively recent example. Is an IPO a primary-market transaction or a secondary-market transaction? LO 2 LO4 LO 3 1.7 LO 3 1.8 not- York Stock Excha from dealer markets? What kind of mark Not-for-Profit Firm Goals. Suppose you were the financial manager LO 2 1.9 for-profit business (a not-for-profit hospital, perhaps). What kinds of goals do you LO 2 LO 2 LO 4 think would be appropriate? 1.10 Ethics and Firm Goals. Can our goal of maximizing the value of the stock conflict with other goals , such as avoiding unethical or illegal behavior? In particular , do you think subjects such as customer and employee safety, the environment, and the general good of society fit in this framework, or are they essentially ignored? Try to think of some specific scenarios to illustrate your answer. 1.11 International Firm Goal. Would our goal of maximizing the value of the stock be different if we were thinking about financial management in a foreign country? Why or why not? 1.12 Agency Problems. Suppose you own stock in a company. The current price per share is $25. Another company has just announced that it wants to buy your company and will pay $35 per share to acquire all the outstanding stock. Your company's management immediately begins fighting off this hostile bid. Is management acting in the shareholders' best interests? Why or why not? 1.13 Agency Problems and Corporate Ownership. Corporate ownership varies around the world. Historically, individuals have owned the majority of shares in public corporations in the United States. In Germany and Japan, however, banks, other large financial institutions, and other companies own most of the stock in public corporations. Do you think agency problems are likely to be more or less severe in Germany and Japan than in the United States? Why? In LO 4 LO 4 recent years, large financial institutions such as mutual funds and pension funds have been becoming the dominant owners of stock in the United States, and these institutions are becoming more active in corporate affairs. What are the implications of this trend for agency problems and corporate control? 1.14 Executive Compensation. Critics have charged that compensation to top management in the United States is simply too high and should be cut back. For example, focusing on large corporations, John Hammergren, CEO of McKesson, earned about $131 million in 2011 and about $285 million over the 2007-2011 period. Are such amounts excessive? In answering, it might be helpful to recognize that superstar athletes such as LeBron James, top entertainers such as Oprah Winfrey, and many others at the top of their respective fields earn at least as much, if not more. 1.15 Sarbanes-Oxley. In response to the Sarbanes-Oxley Act, many small firms in the United States have opted to "go dark" and delist their stock. Why might a company choose this route? What are the costs of "going dark"? LO4 HAT'S ON E WEB? 1.1 Listing Requirements. This chapter discussed some of the listing requirements for the NYSE and NASDAQ. Find the complete listing requirements for the New York Stock Exchange at www.nyse.com and NASDAQ at www.nasdaq.com. Which has more stringent listing requirements? Why don't they have the same listing requirements? 1.2 Business Formation. As you may (or may not) know, many companies incorporate in Delaware for a variety of reasons. Visit BizFilings at www.bizfilings.com to find out why. Which state has the highest fee for incorporation? For an LLC? While at the site, look at the FAQ section regarding corporations and LLCs. 45 Financial Statements, Taxes, and Cash Flow CHAPTER 2 some extra $150 was year. Cash LO 1 LO 2 LO 2 QUESTIONS AND PROBLEMS connect Select problems are available in McGraw-Hill JFINANCE section of the preface for more information. 1. Building a Balance Sheet. Kroeger, Inc., has current assets of $1,970, net fixed Basic assets of $9,650, current liabilities of $1,520, and long-term debt of $4,370. What is (Questions 1-13) the value of the shareholders' equity account for this firm? How much is net working capital? 2. Building an Income Statement. Draiman, Inc., has sales of $795,000, costs of $345,000, depreciation expense of $76,000, interest expense of $41,000, and a tax rate of 35 percent. What is the net income for this firm? 3. Dividends and Retained Earnings. Suppose the firm in Problem 2 paid out $56,000 in cash dividends. What is the addition to retained earnings? 4. Per-Share Earnings and Dividends. Suppose the firm in Problem 3 had 60,000 shares of common stock outstanding. What is the earnings per share, or EPS, figure? What is the dividends per share figure? 5. Market Values and Book Values. Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $8 million. The machinery can be sold to the Romulans today for $6.7 million. Klingon's current balance sheet shows net fixed assets of $3.1 million, current liabilities of $790,000, and net working capital of $145,000. If all the current assets were liquidated today, the company would receive $865,000 cash. What is the book value of Klingon's total assets today? What is the market value? editors plus LO 2 www.mhhe.com I WJ LO 1 Eaces gures actual LO 3 LO 3 why ner than LO 2 erating LO 4 ating cash W. ules, it curs, the or why 6. Calculating Taxes. The SGS Co. had $215,000 in taxable income. Using the rates from Table 2.3 in the chapter, calculate the company's income taxes. 7. Tax Rates. In Problem 6, what is the average tax rate? What is the marginal tax rate? 8. Calculating OCF. Hammett, Inc., has sales of $34,630, costs of $10,340, depreciation expense of $2,520, and interest expense of $1,750. If the tax rate is 35 percent, what is the operating cash flow, or OCF? 9. Calculating Net Capital Spending. Rotweiler Obedience School's December 31, 2013, balance sheet showed net fixed assets of $1,635,000, and the December 31, 2014, balance sheet showed net fixed assets of $1,976,000. The company's 2014 income statement showed a depreciation expense of $305,000. What was Rotweiler's net capital spending for 2014? 10. Calculating Additions to NWC. The December 31, 2013, balance sheet of Maria's Tennis Shop, Inc., showed current assets of $1,045 and current liabilities of $960. The December 31, 2014, balance sheet showed current assets of $1,310 and current liabilities of $1,090. What was the company's 2014 change in net working capital, or NWC? LO4 x ts was sign? as ad sign? change at come LO 4 LO 4 11. Cash Flow to Creditors. The December 31, 2013, balance sheet of Schism, Inc., showed long-term debt of $1,280,000, and the December 31, 2014, balance sheet showed long-term debt of $1,410,000. The 2014 income statement showed an interest expense of $93,400. What was the firm's cash flow to creditors during 2014? 12. Cash Flow to Stockholders. The December 31, 2013, balance sheet of Schism, Inc., showed $120,000 in the common stock account and $2,120,000 in the additional paid-in surplus account. The December 31, 2014, balance sheet showed $135,000 and $2,380,000 in the same two accounts, respectively. If the company paid out $135,000 in cash dividends during 2014, what was the cash flow to stockholders for cash flow is might g of the year? suffer our Understanding Financial Statements and Cash Flow PART 2 LO4 LO 4 13. Calculating Cash Flows. Given the information for Schism, Inc., in Problems 11 and 12, suppose you also know that the firm's net capital spending for 2014 was $640,000, and that the firm reduced its net working capital investment by $105,000. What was the firm's 2014 operating cash flow, or OCF? 14. Calculating Cash Flows. Weiland Co. shows the following information on its 2014 income statement: sales = $167,000; costs = $88,600; other expenses = $4,900; depreciation expense = $11,600; interest expense = $8,700; taxes $18,620; dividends = $9,700. In addition, you're told that the firm issued $2,900 in new equity during 2014, and redeemed $4,000 in outstanding long-term debt. What is the 2014 operating cash flow? b. What is the 2014 cash flow to creditors? What is the 2014 cash flow to stockholders? ermediate Jestions 14-23) a. C. d. If net fixed assets increased by $23,140 during the year, what was the addition to NWC? L LO 2 LO 1 15. Using Income Statements. Given the following information for Sookie's $43,200; Cookies Co., calculate the depreciation expense: sales = $55,000; costs = addition to retained earnings = $2,600; dividends paid = $1,150; interest expense $1,670; tax rate = 40 percent. 16. Preparing a Balance Sheet. Prepare a balance sheet for Alaskan Orange Corp. as of December 31, 2014, based on the following information: cash = $197,000; patents and copyrights = $863,000; accounts payable = $288,000; accounts receivable = $265,000; tangible net fixed assets = $5,300,000; inventory $563,000; notes payable = $194,000; accumulated retained earnings = $4,586,000; long-term debt = $1,450,000. LO1 17. Residual Claims. Chevelle, Inc., is obligated to pay its creditors $7,800 during the year. LO 3 a. What is the value of the shareholders' equity if assets equal $9,300? b. What if assets equal $6,900? 18. Marginal versus Average Tax Rates. (Refer to Table 2.3.) Corporation Growth has $83,000 in taxable income, and Corporation Income has $8,300,000 in taxable income. a. What is the tax bill for each firm? b. Suppose both firms have identified a new project that will increase taxable income by $10,000. How much in additional taxes will each firm this amount the same? 19. Net Income and OCF. Nuri $2,600,000 LO 2 8 ha Compa shareho Th son, it is taxe porate person partnership terminates when a general partner wishes to sell out or as personal income to the partners, and the amount of equity that can be raised is limited to the partners' combined wealth. Ownership by a general partner is not easily transferred because a new partnership must be formed. A limited partner's interest can be sold without dissolving the partnership, but finding a buyer may be difficult. Because a partner in a general partnership can be held responsible for all partner- ship debts, having a written agreement is very important. Failure to spell out the rights and duties of the partners frequently leads to misunderstandings later on. Also, if you are a limited partner, you must not become deeply involved in business decisions un- less you are willing to assume the obligations of a general partner. The reason is that if things go badly, you may be deemed to be a general partner even though you say you are a limited partner. Based on our discussion, the primary disadvantages of sole proprietorships and nerships as forms of business organization are (1) unlimited liability for business debts part- on the part of the owners, (2) limited life of the business, and (3) difficulty of transfer- ring ownership. These three disadvantages add up to a single, central problem: The abil- ity of such businesses to grow can be seriously limited by an inability to raise cash for investment. TC forma tity is an LL differi Servid double too ca For es to con licly ! to LL corporation A business created as a distinct legal entity owned y one or more individuals or entities. AC The c fer, o These liabil try of Corporation The corporation is the most important form (in terms of size) of business organization in the United States. A corporation is a legal "person" separate and distinct from its owners, and it has many of the rights, duties, and privileges of an actual person. Corporations can borrow money and own property, can sue and be sued, and can enter into contracts. A cor- poration can even be a general partner or a limited partner in a partnership, and a corpora- tion can own stock in another corporation. Not surprisingly, starting a corporation is somewhat more complicated than starting the other forms of business organization. Forming a corporation involves preparing articles of incorporation (or a charter) and a set of bylaws. The articles of incorporation must con- tain a number of things, including the corporation's name, its intended life (which can be forever), its business purpose, and the number of shares that can be issued. This informa- tion must normally be supplied to the state in which the firm will be incorporated. For most legal purposes, the corporation is a "resident" of that state. The bylaws are rules describing how the corporation regulates its own existence. For example, the bylaws describe how directors are elected. The bylaws may be amended or extended from time to time by the stockholders. In a large corporation, the stockholders and the managers are usually separate groups. The stockholders elect the board of directors, who then select the managers. Management is charged with running the corporation's affairs in the stockholders' interests. In principle, stockholders control the corporation because they elect the directors. As a result of the separation of ownership and management, the corporate form has several advantages. Ownership (represented by shares of stock) can be readily transferred, and the life of the corporation is therefore not limited. The corporation borrows money in its own name. As a result, the stockholders in a corporation have limited liability for corpo- rate debts. The most they can lose is what they have invested. The relative ease of transferring ownership, the limited liability for business debts, Ca Ba Mc (BI MO Rc Sh Ur Fie and the unlimited life of the business are the reasons why the corporate form is superior when it comes to raising cash. If a corporation needs new equity, it can sell new shares of sa Pe
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1.3 Corporations. The primary disadvantage of the corporate form is the double taxation to
shareholders of distributed earnings and dividends. Some advantages include: limited liability, ease of
transferability, ability to raise capital, and unlimited life.
1.5 Goal of Financial Management. To maximize the current market value (share price) of the equity of
the firm (whether it's publicly-traded or not).
1.7 Primary versus Secondary Market. A primary market transaction.
1.15 Sarbanes-Oxley. In response to Sarbanes-Oxley, small firms have elected to go dark
because of the costs of compli...


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