2024 – 1 Green desires to form a new company to manufacture lawn mowers

1. Green desires to form a new company to manufacture lawn mowers. Green is concerned about having his personal assets exposed to liability for the new company’s contracts and torts.  Furthermore, he wants to retain control over the company’s operations and growth for the next few years. He will need an infusion of equity capital to begin operations. He hopes to take the company public in about five years if it is advantageous to do so at the time.  Which of the following types of business associations would be best for Green’s new company?
(A) Corporation
(B) General partnership
(C) Limited partnership
(D) Member-managed limited-liability company

2. If a firm increases its regular quarterly dividend payment, the increase could indicate which of the following?
I. Improved earnings prospects for the firm
II. A reduction in agency problems of free cash flow
III. A reduction in tax payments for shareholders
(A) I only
(B) II only
(C) I and II only
(D) II and III only

3. The term “net working capital” refers to
(A) inventories, receivables, and current notes and investments
(B) assets divided by liabilities
(C) current assets less short-term liabilities
(D) net assets left over after subtracting cost of goods sold

4. A firm that would like to know whether it has enough cash to meet its bills would be most likely to use which category of financial ratio?
(A) Liquidity
(B) Leverage
(C) Efficiency
(D) Profitability

5. Which of the following should be shown net of tax on a corporation’s income statement?
(A) Discontinued operations
(B) Operating income
(C) Gross profit
(D) Gain on sale of delivery truck

6. In the statement of cash flows, the section for cash flows from operating activities will include which of the following?
(A) Dividends paid
(B) Issuance of common stock
(C) A decrease in accounts payable
(D) Purchase of a building financed entirely by a mortgage

7. Net income $100,000;
Depreciation expense $10,000;
Net increase in accounts: receivable $5,000;
Net increase in accounts: payable $3,000;

On the basis of the information provided in the table above for a corporation, the corporation’s net cash flow from operating activities for the current year is
(A) $98,000
(B) $102,000
(C) $108,000
(D) $118,000

8. Littleton, Inc., has fixed costs of $75,000 per month, variable costs of $5 per unit, and a sales price per unit of $30. What is the break-even quantity per month?
(A) 2,143
(B) 2,500
(C) 3,000
(D) 15,000

9. ABC, Inc., common stock has a current market price of $52 per share. Dividends have been $5 a share for several years and are expected to remain at that level for the foreseeable future. Other companies of similar risk and characteristics yield 10% in the marketplace. What should you recommend concerning ABC stock?
(A) It should be purchased at $52 per share, because that is a fair price.
(B) It should be purchased at $52 per share, because it will yield 10.1%.
(C) It should not be purchased, because it will yield only 2%.
(D) It should not be purchased at more than $50 per share.

10. If you were the holder of a call option (having cost you $2) on some stock with an exercise price of $20, it would be best for you to exercise your option when the market price is at
(A) $18
(B) $20
(C) $22
(D) $24

11. Within the context of the capital asset pricing model (CAPM), the risk measure known as beta is often computed by regressing the return of the company’s stock against the
(A) return on the company’s bonds
(B) return on the market portfolio
(C) change in the gross domestic product
(D) change in the consumer price index

12. You are considering investing in one of the four securities below, characterized as follows.
Security W X Y Z
Expected Return 15% 15% 17% 17%
Standard deviation 25% 30% 25% 30%
Which security makes the most prudent investment?
(A) W
(B) X
(C) Y
(D) Z

13. On May 31, Company O’s general ledger shows a cash balance of $5,123. The May 31 bank statement shows a balance of $4,905.  Other information is available as follows:
1. A May 31 deposit of $300 does not appear on the bank statement; but a $3 service charge does.
2. A customer’s $40 insufficient funds check has been returned with the bank statement.
3. Outstanding checks of $10, $15, and $100 are identified on May 31.

What is the correct cash balance on May 31?
(A) $4,905
(B) $5,080
(C) $5,166
(D) $5,204

14. If a multinational company cannot change the level of political risk its foreign subsidiaries experience in unstable regions, which of the following hedging tactics would best help the company minimize potential losses?
(A) Market control of distribution
(B) Currency futures contracts
(C) Local debt financing
(D) Key input control

15. Some companies have little, if any, net income or earnings, yet they seem to have all the money they need for capital expenditures. Which of the following best explains how such companies operate?
(A) They have good cash flows.
(B) They lease capital equipment that does not show up on balance sheets.
(C) They have accounts with many different banks.
(D) They issue warrants to their officers.