1. In limited liability partnerships, the liability protection does not protect partners from their own individual acts of malpractice. TRUE or FALSE
2. Which of the following legal forms of organization is most expensive to organize?
a. Sole Proprietorships
b. Partnerships
c. Corporations
d. Limited Partnerships
3. Under which of the following legal forms of organization, is ownership readily transferable?
a. Sole Proprietorships
b. Partnerships
c. Corporations
d. Limited Partnerships
4. A major weakness of a partnership is
a. Limited Liability
b. Difficulty liquidating or transferring ownership
c. Access to capital markets
d. Low organization cost
5. About 75 percent of all business firms are
a. Sole Proprietorships
b. Partnerships
c. Corporations
d. Limited Partnerships
6. Johnson, Inc. has just ended the calendar year making a sale in the amount of $10,000 of merchandise purchased during the year at a total cost of $7,000. Although the firm paid in full for the merchandise during the year, it has yet to collect at year end from the customer. The net profit and cash flow from this sale for the year are
a. $3,000 and $10,000, respectively
b. $3,000 and –$7,000, respectively
c. $7,000 and –$3,000, respectively
d. $3,000 and $7,000, respectively
7. The average tax rate of a corporation with ordinary income of $105,000 and a tax liability of $24,200 is
a. 46 percent
b. 23 percent
c. 34 percent
d. 15 percent
8. Consider two firms, Go Debt corporation and No Debt corporation. Both firms are expected to have earnings before interest and taxes of $100,000 during the coming year. In addition, Go Debt is expected to incur $40,000 in interest expenses as a result of its borrowings whereas No Debt will incur no interest expense because it does not use debt financing. However, No Debt will have to pay stockholders $40,000 in dividend income. Both firms are in the 40 percent tax bracket. Calculate the Earnings after tax for both firms. Which firm has the higher after–tax earnings? Which firm appears to have the higher cash flow? How do you account for the difference?
Worksheet
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Go Debt
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No Debt
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Earnings before interest and taxes
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Less: Interest expense
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Earnings before taxes
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Less: Taxes (40%)
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Earnings after taxes
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Less: Dividends
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Net Income
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9. If a person requires greater return when risk increases, that person is said to be
a. risk–seeking
b. risk–indifferent
c. risk–averse
d. risk–aware
10. The ________ is the extent of an asset’s risk. It is found by subtracting the pessimistic outcome from the optimistic outcome
a. Return
b. Standard Deviation
c. Probability distribution
d. Range
11. A(n) ________ portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return.
a. Efficient
b. Coefficient
c. Continuous
d. risk–indifferent
12. Examples of events that increase risk aversion include.
a. a stock market crash
b. assassination of a key political leader
c. the outbreak of war
d. all of the above
13. Two approaches for dealing with project risk to capture the variability of cash inflows and NPVs are…
a. sensitivity analysis and simulation
b. scenario analysis and simulation
c. sensitivity analysis and scenario analysis
d. none of the above
14. A firm had the following accounts and financial data for 2005
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The firm’s net profit after taxes for 2005 was…..
a. –$206.40
b. $213.80
c. $320.40
d. $206.25
15. Firm ABC had operating profits of $100,000, taxes of $17,000, interest expense of $34,000 and preferred dividends of $5,000. What was the firm’s net profit after taxes?
a. $66,000
b. $49,000
c. $44,000
d. $83,000
16. Candy Corporation had pretax profits of $1.2 million, an average tax rate of 34 percent, and it paid preferred stock dividends of $50,000. There were 100,000 shares outstanding and no interest expense. What were Candy Corporation’s earnings per share….
a. $3.91
b. $4.52
c. $7.42
d. $7.49
17. The 2002 Sarbanes–Oxley Act was designed to
a. limit the compensation that could be paid to corporate CEOs
b. eliminate the many disclosure and conflict of interest problems of corporations
c. provide uniform international accounting standards
d. two of the above
18. The primary concern of creditors when assessing the strength of a firm is the firm’s.
a. Profitability
b. Leverage
c. short–term liquidity
d. share price
19. The analyst should be careful when conducting ratio analysis to ensure that
a. the overall performance of the firm is not judged on a single ratio
b. the dates of the financial statements being compared are the same
c. audited statements are used
d. the same accounting procedures were used
e. all of the above
20. Which ratio may indicate that the firm will not be able to meet interest obligations due on outstanding debt
a. Debt
b. net profit margin
c. return on total assets
d. times interest earned
