Q&A Hero

Q: An income statement may be represented as follows: A) Sales - Liabilities = Profits. B) Revenues - Liabilities = Net Income. C) Sales - Expenses = Retained Earnings. D) Sales - Expenses = Profits.

Q: Gross profit is equal to A) profits plus depreciation. B) revenues - expenses. C) earnings before taxes minus taxes payable. D) sales - cost of goods sold.

Q: Corporation A decides to borrow $1,000,000 and use the money to buy back $1,000,000 of its common stock. The corporation pays 6% interest on its borrowed funds which exactly equals the amount of the dividend it used to pay on the common stock it repurchased. Therefore, A) Corporation A's operating income will decrease due to higher interest expense. B) Corporation A's net income will increase due to the tax deductibility of interest expense. C) Corporation A will have no change in its operating income since the interest expense exactly offsets the prior dividend payment. D) Corporation A's gross profit will decrease.

Q: A firm's financing costs include A) depreciation expense. B) interest expense C) costs of goods sold. D) both A and B.

Q: The increase in owners' equity for a given period is equal to A) positive net cash flow minus dividends. B) net income minus dividends. C) sales minus dividends. D) gross profit minus distributions to shareholders.

Q: Corporation B reported earnings per share of $10. Corporation B has 100,000 shares of common stock outstanding and reported an increase in owners' equity of $400,000 for the period. Corporation B paid $50,000 in interest expense during the period. Corporation B paid dividends per share of A) $6.00. B) $5.50. C) $6.50. D) $14.003.

Q: California Retailing Inc. has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. The firm's interest expense is $250,000, and the corporate tax rate is 40%. What is California Retailing's net income? A) $288,000 B) $350,000 C) $377,000 D) $390,000

Q: California Retailing Inc. has sales of $4,000,000; the firm's cost of goods sold is $2,500,000; and its total operating expenses are $600,000. What is California Retailing's EBIT? A) $850,000 B) $875,000 C) $900,000 D) $1,300,000

Q: What information does a firm's income statement provide to the viewing public? A) an itemization of all of a firm's assets and liabilities for a defined period of time B) a complete listing of all of a firm's cash receipts and cash expenditures for a defined period of time C) a report of revenues and expenses for a defined period of time D) a report of investments made and their cost for a specific period of time

Q: Which of the following represents an attempt to measure the net results of the firm's operations (revenues versus expenses) over a given time period? A) balance sheet B) statement of cash flows C) income statement D) sources and uses of funds statement

Q: Which of the following statements concerning net income is MOST correct? A) Net income represents cash available to pay dividends. B) Net income represents sales minus operating expenses at a specific point in time. C) Negative net income reduces a company's cash balance. D) Net income represents income that may be reinvested in the firm or distributed to its owners.

Q: A corporation's operating profit margin is equal to A) net income divided by sales. B) EBIT divided by sales. C) EBIT divided by net income. D) sales divided by EBIT.

Q: Use the following information to calculate the company's accounting net income for the year.Credit Sales$800,000Cash Sales$500,000Operating Expenses on Credit$200,000Cash Operating Expenses$700,000Accounts Receivable (Beg. of Year)$50,000Accounts Receivable (End of Year)$80,000Accounts Payable (Beg. of Year)$50,000Accounts Payable (End of Year)$100,000Corporate Tax Rate40%A) $300,000B) $240,000C) $125,000D) $120,000

Q: Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000; Rogue's operating profit margin is equal to A) 25.67%. B) 35.67%. C) 36.67%. D) 50.00%.

Q: Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's net profit margin is equal to A) 25.67%. B) 35.67%. C) 36.67%. D) 50.00%.

Q: Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's operating income is equal to A) $770,000. B) $1,070,000. C) $1,100,000. D) $1,500,000.

Q: Rogue Industries reported the following items for the current year: Sales = $3,000,000; Cost of Goods Sold = $1,500,000; Depreciation Expense = $170,000; Administrative Expenses = $150,000; Interest Expense = $30,000; Marketing Expenses = $80,000; and Taxes = $300,000. Rogue's gross profit is equal to A) $770,000. B) $1,070,000. C) $1,100,000. D) $1,500,000.

Q: The basic format of an income statement is A) Sales - Expenses = Profits. B) Income - Expenses = EBIT. C) Sales - Liabilities = Profits. D) Assets - Liabilities = Profits.

Q: The A corporation has an operating profit margin of 20%, operating expenses of $500,000, and financing costs of $15,000. Therefore, A) the corporation's gross profit margin is less than 20%. B) the corporation's net profit margin is greater than 20%. C) the corporation's gross profit margin is greater than 20%. D) the corporation's gross profit margin is equal to 20% because gross profit is not affected by operating expenses or financing costs.

Q: Company A and Company B both report the same level of sales and net income. Therefore, A) both A and B will report the same Earnings Per Share. B) both A and B will report the same Gross Profit Margin. C) both A and B will report the same Net Profit Margin. D) both A and C are true.

Q: Profits-to-Sales relationships are defined as profit margins.

Q: Earnings available to common shareholders is equal to a corporation's positive net cash flow over a given period, typically one year.

Q: Earnings available to common shareholders represents income that may be reinvested in the firm or distributed to its owners.

Q: Changes in depreciation expense do not affect operating income because depreciation is a non-cash expense.

Q: The more debt a company uses to finance its assets, the lower will be its operating income due to higher interest expense.

Q: Earnings before taxes, or taxable income, is equal to operating income minus financing costs.

Q: Net profit margin is equal to the gross profit margin times the operating profit margin.

Q: Common-sized income statements restate the numbers in the income statement as a percentage of sales to assist in the comparison of a firm's financial performance across time and with competitors.

Q: Common-sized income statements are used to compare companies that have the same amount of revenues.

Q: If two companies have the same revenues and operating expenses, their net incomes will still be different if one company finances its assets with more debt and the other company with more equity.

Q: Owners equity increases each period by the amount of the corporation's positive net cash flow.

Q: An income statement reports a firm's cumulative revenues and expenses from the inception of the firm through the income statement date.

Q: What are the three major functions of an investment banker?

Q: A commitment fee is A) an amount paid on the unused portion of a loan in a private placement. B) an amount paid by an investment banker to ensure the sale of securities. C) paid by investors to guarantee that a company will borrow from them. D) paid by bondholders to secure the right to convert bonds into common stock.

Q: The Sarbanes-Oxley Act, or SOX A) holds corporate advisors strictly accountable in a legal sense for any instances of misconduct. B) pretexts the interests of shareholders by providing greater protection against accounting fraud and financial misconduct. C) reduces the cost of financial reporting by standardizing reporting requirements. D) accomplishes both A and B.

Q: The Sarbanes-Oxley Act of 2002 holds all of the following groups strictly accountable in a legal sense for any instances of misconduct EXCEPT A) company officers. B) outside members of the board of directors. C) lawyers. D) investors.

Q: The Sarbanes-Oxley Act of 2002, in order to protect investors, requires a higher level of accountability for which of the following groups? A) corporate officers B) public accountants C) boards of directors D) all of the above

Q: The costs associated with issuing securities to the public can be high. Some types of securities have greater expenses associated with them than others. Which of the following is the most costly security to issue? A) common stock B) corporate bonds C) preferred stock D) all of the above

Q: Which of the following would NOT normally be considered a "flotation cost"? A) underwriter's spread B) dividends C) legal fees D) printing and engraving expenses

Q: Private placements usually have several advantages associated with them, but also tend to suffer from specific disadvantages. Which of the following is a disadvantage of a private placement when compared to other methods of selling new securities? A) strictly standardized features/terms B) higher interest costs C) reduced flotation costs D) avoidance of registration with the SEC

Q: Advantages of private placements do NOT include which of the following? A) more financing flexibility B) lower flotation costs C) investor protection through extensive regulation D) funds which are available more quickly than through a public offering

Q: All of the following are typically advantages of private placements EXCEPT A) speed. B) reduced flotation costs. C) financial flexibility. D) the possibility of future SEC registration.

Q: Private placements are A) limited to debt securities. B) limited to equity securities. C) available for both debt and equity securities, but the market is dominated by equity issues. D) especially appealing to new, small, and medium-sized companies.

Q: Which of the following statements is MOST correct concerning flotation costs? A) Flotation costs are the same for common stock, preferred stock and bonds because they reflect mainly printing costs and legal fees. B) Flotation costs are generally higher for bonds rather than stocks because the dollar amounts involved are much higher, allowing for economies of scale. C) Flotation costs as a percentage of gross proceeds increase as the size of the security issue increases. D) Flotation costs are higher for common stocks than for preferred stocks and bonds due to the higher level of risk associated with owning common stock.

Q: Which of the following is an advantage of using private placements for debt? A) reduced costs from the elimination of the registration statement for the SEC, investment-banking underwriting fees and distribution costs B) lower interest costs C) fewer and less burdensome restrictive covenants D) the possibility of future SEC registration

Q: Which of the following statements concerning private placements is MOST correct? A) Private placements do not involve investment bankers. B) Although not selling the securities to the public, investment bankers may provide advice on the evaluation of prospective buyers and the terms of sale for private placements. C) Private placements are limited to stocks, not bonds. D) More than half of all private placements are sold to federal, state, or local governments or government agencies.

Q: Commercial banks that also provide investment banking services are called A) conglomerate banks. B) multi-purpose banks. C) investment enhanced banks. D) universal banks.

Q: A "Dutch auction" was used by Google to raise money in 2004. A Dutch auction involves A) selling bonds in Europe. B) allowing investors to submit bids saying how many shares they'd like to buy and at what price. C) allowing investment banking firms to submit bids on how many shares they are willing to sell and at what price. D) hiring a Dutch firm to sell a company's securities at auction.

Q: Investment banking firms offer to facilitate the sale of securities to the public in a variety of ways. Which of the following methods guarantees the corporation with a pre-determined price for the securities? A) a best efforts basis B) a commission basis C) a competitive bid D) an underwriting

Q: When an investment banking firm "underwrites" an issue of securities, the firm is performing which of the following? A) agreeing to market the securities to investors for a fee B) giving legal advice to the firm that is issuing the securities C) offering to purchase the securities from the firm, thereby assuming the risk of resale to investors D) agreeing to provide insurance that the firm's securities will sell for a price that is established by the firm

Q: The investment banker performs what three basic functions? A) underwriting, distributing, and regulating B) underwriting, advising, and price-pegging C) underwriting, distributing, and advising D) underwriting, distributing, and negotiating

Q: Which of the following statements about investment banking in the United States is MOST correct? A) Investing banking is dominated by a few, very large, stand-alone investment banking firms, such as Bear Stearns. B) The investment banking industry is dominated by large banks that are also investment bankers. C) The top five banks involved in investment banking account for less than 25% of the industry's total market share. D) The investment banking industry became more competitive following the financial crisis in 2007 and 2008.

Q: Which of the following relationships is true regarding the costs of issuing the following securities? A) common stock > bonds > preferred stock B) preferred stock > common stock > bonds C) bonds > common stock > preferred stock D) common stock > preferred stock > bonds

Q: The investment banker does NOT underwrite the securities to be issued in which of the following? A) initial public offering B) primary market transaction C) firm commitment D) best efforts

Q: Activities of the investment banker include A) assuming the risk of selling a security issue. B) selling new securities to the ultimate investors. C) providing advice to firms issuing securities. D) all of the above

Q: Spandra Electronics wants to raise money by selling stock. After talking to several investment banking firms, Spandra decides to hire Goldman Sachs to sell 5 million shares of its common stock. Goldman sells 4.5 million shares and returns the rest to Spandra. This is an example of A) a privileged subscription with a standby agreement. B) a commission or best-efforts agreement. C) a privileged subscription with a standby agreement. D) a competitive bid purchase.

Q: Reynolds, Inc. needs to raise $5 million by selling common stock. Reynolds sells 1 million shares of stock at $5 each to Goldman Sachs, who then is responsible for selling the shares to investors. This is an example of a A) privileged subscription. B) standby agreement. C) negotiated purchase. D) commission or best-efforts agreement.

Q: If a corporation wants a guarantee that all of its shares of stock will be sold, it should use which of the following distribution methods? A) competitive bid purchase B) privileged subscription with no standby agreement C) commission or best-efforts contract D) direct sale

Q: A corporation sells securities to an investment banking firm on January 1st. The next day an international oil crisis causes stock prices to drop dramatically. The corporation is immune from the drop in price of its stock due to which function of the investment banking firm? A) hedging B) distributing C) reinsurance D) underwriting

Q: Investment firms, such as Goldman Sachs, assist the transfer of capital by A) facilitating indirect transfers from savers (investing public) to borrowers (corporations needing capital). B) selling indirect securities to savers and using the funds to buy common stock for corporations needing funds. C) selling direct securities. D) selling common stock for corporate clients in the secondary market.

Q: When a company repurchases its own common stock, it is likely that A) the stock price will increase because the company views the stock as undervalued. B) the stock price will decrease because the company is creating artificial demand for its stock. C) the stock price will remain the same as this is simply an internal transaction. D) the board of directors will be fired for incompetence.

Q: The provisions of the Sarbanes-Oxley Act of 2002, or SOX, apply to all U.S.-based corporations, as well as to foreign corporations conducting business in U.S. markets.

Q: In a private placement, the securities are offered and sold to a limited number of investors.

Q: Preferred stock is traded in the money market, while common stock is traded in the capital market.

Q: Only individual investors participate in public offerings, while institutional investors participate in private placements.

Q: The investment banking business is dominated by a few very large, stand-alone investment banking firms.

Q: Because they occur in private, stricter regulations are placed on the private placement of securities.

Q: The bid price is the price that a dealer will pay for a security; the asked price is the price at which she will sell a security.

Q: The competitive bid purchase is largely confined to railroad, public utility, and municipal bond issues.

Q: The investment banker prefers to avoid a negotiated purchase because it tends to be the least profitable arrangement for the investment banker.

Q: It is common practice among the largest corporations to sell their securities directly to investors.

Q: A group of investment bankers organized to distribute large securities issues is known as a syndicate.

Q: The syndicate can be thought of as a wholesaler of securities and the dealer organization as a retailer of securities.

Q: Investment banking firms are prohibited from selling securities due to conflicts of interest.

Q: An investment banker assumes underwriting risk in both negotiated purchases and privileged subscriptions with standby agreements.

Q: When the corporation sells securities directly to the investment public without involving an investment banker, it is called a privileged subscription.

Q: The negotiated purchase is the most prevalent method of securities distribution in the private sector.

Q: The investment banker performs three basic functions: (1) underwriting, (2) distributing, and (3) advising.

Q: The need for extensive regulation of investment banking firms is limited due to the highly competitive nature of that industry.

Q: The difference between the price the corporation gets and the public offering price is called the broker-dealer spread.