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1. Overview of Financial Management

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2. Financial Market and Institutions

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3. Financial Statements, Cash Flow, and Taxes

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4. Analysis of Financial Statements

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Please highlight your answer in yellow.

1. Overview of Financial Management

The sole proprietorship is the same as the individual for liability purposes.
The owners of a corporation are liable for the corporation's obligations up to the amount of their investment.
There is no legal distinction made between the assets of the business and the personal assets of the owners in the limited par
The financial manager should examine available risk-return trade-offs and make his decision based upon the greatest expected
For the risk-averse financial manager, the more risky a given course of action, the higher the expected return must be.

2. Financial Market and Institutions

Primary markets are large and important, while secondary markets are smaller and less important.
When a corporation's shares are owned by a few individuals who are associated with the firm's management, we saythat the
The term IPO stands for "individual purchase order," as when an individual (as opposed to an institution) places anorder to bu
Hedge funds are somewhat similar to mutual funds. The primary differences are that hedge funds are less highlyregulated, ha
investors to wealthy, sophisticatedindividuals and institutions.
Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield(which cou
all the stocks in the S&P 500. A weighted average of those returns, using each stock's total market value, is then calculated, an
on the market."
Each stock's rate of return in a given year consists of a dividend yield (which might be zero) plus a capital gains yield(which cou
all the stocks in the S&P 500. A simple average of those returns (which gives equal weight to each company in the S&P 500) is
Index," and it is often used as an indicator of the "return on the market."

3. Financial Statements, Cash Flow, and Taxes

Corporate income statements are usually compiled on an accrual, rather than cash, basis.
A balance sheet is a statement of the financial position of the firm on a given date, including its asset holdings, liabilities, and e
Operating profit margin is impacted by sales and all operating expenses except cost of goods sold.
If a firm is reporting its income in accordance with generally accepted accounting principles, then its net income as reported o
Assume that two firms are both following generally accepted accounting principles. Both firms commenced operations two ye
sold any of those assets or purchased any new fixed assets. The two firms would be required to report the same amount of ne
presented to investors.
An increase in accounts receivable represents an increase in net cash provided by operating activities because receivables will
The time dimension is important in financial statement analysis. The balance sheet shows the firm's financial position at a give
of time, and the statement of cash flows reflects specific changes in accounts over that period of time.

4. Analysis of Financial Statements

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Suppose you are analyzing two firms in the same industry. Firm A has a profit margin of 10% versus a profit margin
of 8% for Firm B. Firm A's total debt to total capital ratio [measured as (Short-term debt + Long-term debt)/(Debt +
Preferred stock + Common equity)] is 70% versus one of 20% for Firm B. Based only on these two facts, you cannot
reach a conclusion as to which firm is better managed, because the difference in debt, not better management, could be the
cause of Firm A's higher profit margin.
The price/earnings (P/E) ratio tells us how much investors are willing to pay for a dollar of current earnings. In
general, investors regard companies with higher P/E ratios as being less risky and/or more likely to enjoy higher growth in
the future.
Market value ratios provide management with an indication of how investors view the firm's past performance and especially
It is appropriate to use the fixed assets turnover ratio to appraise firms' effectiveness in managing their fixed assets if
and only if all the firms being compared have the same proportion of fixed assets to total assets.
Firms A and B have the same current ratio, 0.75, the same amount of sales, and the same amount of current liabilities.
However, Firm A has a higher inventory turnover ratio than B. Therefore, we can conclude that A's quick ratio must be
smaller than B's.
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For Multiple Choice Questions, please highlight your answer in yellow. Others, please provide your answer in the bl

2. Financial Market and Institutions

(I) Debt markets are often referred to generically as the bond market.
(II) A bond is a security that is a claim on the earnings and assets of a corporation.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.

A declining stock market index due to lower share prices

A) reduces people's wealth and as a result may reduce their willingness to spend.
B) increases people's wealth and as a result may increase their willingness to spend.
C) decreases the amount of funds that business firms can raise by selling newly issued stock.
D) both A and C of the above.
E) both B and C of the above.

Banks are important to the study of money and the economy because they
A) provide a channel for linking those who want to save with those who want to invest.
B) have been a source of financial innovation that is expanding the alternatives
available to those wanting to invest their money.
C) are the only financial institution to play a role in determining the quantity of
money in the economy.
D) do all of the above.
E) do only A and B of the above.

(I) Banks are financial intermediaries that accept deposits and make loans.
(II) The term "banks" includes firms such as commercial banks, savings and loan associations,
mutual savings banks, credit unions, insurance companies, and pension funds.
A) (I) is true, (II) false.
B) (I) is false, (II) true.
C) Both are true.
D) Both are false.

3. Financial Statements, Cash Flow, and Taxes

During the year, PCPA Corp. had sales of $565,600. Costs of goods sold,
administrative and selling expenses, and depreciation expenses were
$476,000, $58,800, and $42,800, respectively. In addition, the company
had an interest expense of $112,000 and a tax rate of 22 percent. What is
the operating cash flow for the year? Ignore any tax loss carry-forward
provisions.
A) $17,920
B) $21,840
C) $30,800
D) $52,600
E) $77,840

SGV started the year with $650,000 in the common stock account and
$1,318,407 in the additional paid-in surplus account. The end-of-year
balance sheet showed $720,000 and $1,299,310 in the same two accounts,
respectively. What is the cash flow to stockholders if the firm paid $68,500
in dividends?
A) −$17,597
B) $17,597
C) −$1,500
D) $1,500
E) $68,500

PwC has beginning total debt of $682,400 and ending total debt of
$697,413. Current liabilities increased by $18,915 during the year. What
was the cash flow to creditors if the firm paid $34,215 in interest during the
year?
A) $384
B) $287
C) $38,117
D) $20,228
E) $19,202

Deloitte has beginning net fixed assets of $684,218, ending net fixed assets
of $679,426, and depreciation expense of $48,859. What is the net capital
spending for the year if the tax rate is 25 percent?
A) $42,920
B) $53,651
C) $44,067
D) $35,255
E) $48,600

4. Analysis of Financial Statements

The balance sheet and income statement shown below are for Faith Inc.
Note that Faith Inc. has no amortization charges, it doesn't lease any assets,
zero of its debt must be retired during the next 5 years, and the notes
payable will be just rolled over.

Balance Sheet (Millions of $) 2015

Assets $ 2,500
Cash and securities 11,500
Accounts receivable 16,000
Inventories $30,000
Total current assets $20,000
Net plant and equipment $50,000
Total assets
Liabilities and Equity Accounts payable $ 9,500
Accruals 5,500
Notes payable 7,000
Total current liabilities $22,000

Long-term bonds $15,000

Total liabilities $37,000
Common stock $ 2,000
Retained earnings 11,000
Total common equity $13,000
Total liabilities and equity $50,000

Income Statement (Millions of $) 2015

Net sales $87,500
Operating costs except depreciation 81,813
Depreciation 1,531
Earnings bef interest and taxes (EBIT) $ 4,156
Less interest 1,375
Earnings before taxes (EBT) $ 2,781
Taxes 973
Net income $ 1,808
Other data:
Shares outstanding (millions) 500
Common dividends $632.73
Int rate on notes payable & L-T bonds 6.25%
Federal plus state income tax rate 35%
Year-end stock price $43.39
provide your answer in the blank cell.
 Questions
What is the firm's current ratio?
What is the firm's quick ratio?
What is the firm's days sales outstanding? Assume a 365-day year for this calculation.
What is the firm's total assets turnover?
What is the firm's inventory turnover ratio?
What is the firm's TIE?
What is the firm's total debt to total capital ratio?
What is the firm's ROA?
What is the firm's ROE?
What is the firm's BEP?
What is the firm's profit margin?
What is the firm's return on invested capital?
What is the firm's operating margin?
What is the firm's dividends per share?
What is the firm's EPS?
What is the firm's P/E ratio?
What is the firm's book value per share?
What is the firm's market-to-book ratio?
What is the firm's equity multiplier?
Answers