What changes in the balance sheet accounts would constitute sources of funds? What changes would be considered uses of funds? What will be an ideal response? ANSWER Increases in liabilities and equity would be considered sources of funds. For example, increases in debt, A/P, N/P, R/E or equity. Uses of funds are increases […]
Which of the following is true of arguments for dividend relevance? A) A firm’s value is determined solely by the earning power and risk of its assets. B) Investors are generally risk averse and attach less risk to current dividends than future dividends or capital gains. C) The value of a firm is unaffected as […]
What is sales revenue, less cost of goods sold and operating expenses, called for income statement purposes? A) Net profit before taxes B) Retained earnings C) Net income available to preferred shareholders D) EBIT ANSWER D
As long as a firm’s cost of sales are primarily ________ then the firm’s gross profit margin should be ________ from year to year. A) variable; roughly equal B) variable; vary widely C) fixed; more likely to be the same D) fixed; also fixed ANSWER A
Modigliani and Miller suggest that the value of a firm is not affected by the firm’s dividend policy, due to ________. A) the relevance of dividends B) the clientele effect C) the informational content D) the optimal capital structure ANSWER B
The type of financing (whether with debt or equity) does not affect which stream of income? A) Net profit after tax but before dividends. B) Net working capital C) Operating income D) Income before tax ANSWER C
A balance sheet is a statement of the financial position of the firm on a given date, including its asset holdings, liabilities, and equity. Indicate whether the statement is true or false ANSWER TRUE
In the text figure 4.2 one industry stands out with an ROE in excess of 50%. This figure is well above the next highest industry ROE of just over 30%. Which of the following is that high-performing industry? A) Steel B) Tobacco C) Newspaper D) Beverages ANSWER B
While an earnings requirement limiting the amount of dividends paid is sometimes imposed, a firm is not prohibited from paying more in dividends than its current earnings. Indicate whether the statement is true or false ANSWER TRUE
The firm’s ________ indicates how much the firm’s profits contribute to ROE. A) asset turnover B) financial leverage C) profit margin D) return on assets ANSWER C
