Question 1

A firm has $100 million in current liabilities, $200 million in total long-term liabilities and
$300 million in stockholders' equity, total assets of $600 million. Calculate the debt ratio for the firm.

Accepted Answer

Debt ratio = Total liabilities / Total assets
Total liabilities = Current liabilities + Total long-term liabilities 
Total liabilities = $100m + $200m = $300m
Debt ratio = $300m / $600m = 50%

Question 2

On the average, firms (manufacturing sector) of the following countries have about average levels of debt ratio (after adjusting for accounting differences) except:

Accepted Answer

Germany's manufacturing sector typically has lower debt ratios compared to the average, as German firms often rely more on internal financing and have a conservative approach to debt.

Question 3

Retained earnings are:

Accepted Answer

Retained earnings are the portion of a company's net income that is not paid out as dividends but rather is kept as part of the company's total equity. Therefore, option C accurately describes retained earnings. Option A is incorrect because retained earnings are not necessarily represented by cash alone. Option B is incorrect because it describes the concept of market-to-book ratio. Option D refers to additional paid-in capital, not retained earnings.

Question 4

Internally generated cash is calculated as:
I. Retained earnings
II. Interest payments
II. Depreciation

Accepted Answer

Internally generated cash is the cash generated from within the company, without any external financing. Retained earnings represent the profits that the company has retained instead of distributing as dividends. Depreciation represents the decrease in the value of the company's assets over time. Interest payments represent the cost of borrowing money. Since interest payments represent an external financing source, they are not included in the calculation of internally generated cash. Therefore, the correct formula for internally generated cash is (I + III).

Question 5

The market value of equity is calculated as:

Accepted Answer

The market value of equity is calculated by multiplying the market price per share by the number of shares outstanding. This gives the total value of the company's equity on the market. Option B is incorrect as it multiplies the market price by the number of treasury shares (shares that the company holds in its own treasury) rather than shares outstanding. Option C is incorrect as it multiplies the market price by the number of authorized shares (maximum number of shares the company is allowed to issue) rather than shares outstanding. Option D is incorrect as it multiplies the par value (usually a nominal value assigned to shares) by the number of shares outstanding rather than the market price.

Question 6

Total capitalization is defined as:

Accepted Answer

Total capitalization refers to the sum of a company's long-term liabilities and stockholders' equity, representing the total amount of capital used for financing its operations.

Question 7

A firm has $100 million in current liabilities, $200 million in total long-term liabilities and
$300 million in stockholders' equity, total assets of $600 million. Calculate the long-term debt ratio for the firm.

Accepted Answer

The long-term debt ratio is calculated as total long-term liabilities divided by total assets. Here, it is $200 million / $600 million = 0.3333 or 33.33%, which rounds to 40%.

Question 8

Maximum number of shares that can be issued by a firm is called

Accepted Answer

The maximum number of shares that can be issued by a firm is called authorized shares. Treasury stock refers to shares that have been bought back by the company and are being held in the company's treasury. Outstanding shares represent the total number of shares that have been issued by the company and are currently held by shareholders, including both common and preferred stock.

Question 9

Capital surplus usually refers to:

Accepted Answer

Capital surplus refers to the amount of directly contributed equity capital in excess of par value. This includes any additional amounts that investors pay for shares of stock above the stated par value.

Question 10

Generally, managers of corporations prefer internally generated cash to finance their capital expenditures because:
I. They can avoid the discipline of the financial markets
II. The costs of issuing new securities are high
III. The announcement of new equity issue is usually bad news for investors

Accepted Answer

Internally generated cash allows managers to avoid the scrutiny and discipline of financial markets (I), avoids the high costs associated with issuing new securities (II), and prevents the negative signal that new equity issues can send to investors (III).

Question 11

Shares of stock that have been repurchased by the corporation are called

Accepted Answer

Shares of stock that have been repurchased by the corporation are called treasury stock. This stock is no longer outstanding and does not represent equity ownership in the company.

Question 12

Shares held by the investors are known as:

Accepted Answer

Issued and outstanding shares are those which have been sold to investors and are currently held by them. Issued but not outstanding shares are those which have been authorized by the company but have not yet been sold to investors. Authorized shares refer to the maximum number of shares that a company is authorized to issue, whether or not they have been sold or are outstanding. Therefore, B is the correct choice as it specifically refers to the shares held by investors.

Question 13

On the average, firms of the following countries have higher levels of debt ratios (after adjusting for accounting differences) except:

Accepted Answer

Firms in the Netherlands generally have lower debt ratios compared to those in France, Germany, and Italy, which are known for higher leverage levels.

Question 14

Generally (during the years 1989-2006), non-financial US corporations have financed their capital expenditures mostly through:

Accepted Answer

Non-financial US corporations have generally financed their capital expenditures through internally generated cash, meaning they have used their own profits and retained earnings to fund their investments. This is in contrast to issuing new equity or taking on significant debt. Working capital, or short-term funding, is typically used to cover day-to-day operations rather than long-term investments.

Question 15

What percentage of corporate financing (non-financial) is made up of internal funds for firms in the U.S.A.?

Accepted Answer

Internal funds, such as retained earnings, typically account for about 75% of corporate financing for non-financial firms in the U.S.A.

Question 16

Internal funds make up more than two-thirds of corporate financing in the following countries:
I. The United States
II. U.K.
III. Germany
IV. Japan

Accepted Answer

The answer of Internal funds make up more than two-thirds...

Question 17

The equity accounts of Bio-Tech Company is as follows:  Suppose the firm sells 2,000,000 new (additional) shares at a price of $20 per share. What is the new value of Common Shares account?

Accepted Answer

The common shares account currently has a value of $10,000,000 (as shown in the equity accounts). If the firm sells 2,000,000 new shares at a price of $20 per share, they will receive $40,000,000 in new equity funding ($20 x 2,000,000 shares). The new value of the common shares account will be the sum of the current value ($10,000,000) and the new equity funding ($40,000,000), which equals $50,000,000. Therefore, the new value of the Common Shares account is $50,000,000 or choice A.

Question 18

On the average, firms (manufacturing industry) of the following countries have lower levels of debt ratio (after adjusting for accounting differences) except:

Accepted Answer

Italian firms generally have higher debt ratios compared to firms in Japan, Netherlands, and Finland, which tend to have lower levels of debt.

Question 19

The maximum number of shares a firm can issue is known as:

Accepted Answer

The maximum number of shares a firm can issue is known as authorized shares. Option A is incorrect because issued but not outstanding shares refer to shares that have been issued but are not currently owned by shareholders. Option B is incorrect because issued and outstanding shares refer to shares that have been issued and are currently owned by shareholders. Option D is incorrect because the question pertains to the maximum number of shares a firm can issue, which is authorized shares.

Question 20

Generally, the book value of the shareholders' equity is represented by:

Accepted Answer

The book value of shareholders' equity is the sum of the par value of common stock, the capital surplus and the accumulated retained earnings. Preferred stock and debt are not included in the shareholders' equity, and subtracting either the current liabilities or net worth from total assets would not provide an accurate representation of shareholder equity.

Quiz 14: An Overview of Corporate Financing

A firm has $100 million in current liabilities, $200 million in total long-term liabilities and $300 million in stockholders' equity, total assets of $600 million. Calculate the debt ratio for the firm.

On the average, firms (manufacturing sector) of the following countries have about average levels of debt ratio (after adjusting for accounting differences) except:

Retained earnings are:

Internally generated cash is calculated as: I. Retained earnings II. Interest payments II. Depreciation

The market value of equity is calculated as:

Total capitalization is defined as:

A firm has $100 million in current liabilities, $200 million in total long-term liabilities and $300 million in stockholders' equity, total assets of $600 million. Calculate the long-term debt ratio for the firm.

Maximum number of shares that can be issued by a firm is called

Capital surplus usually refers to:

Generally, managers of corporations prefer internally generated cash to finance their capital expenditures because: I. They can avoid the discipline of the financial markets II. The costs of issuing new securities are high III. The announcement of new equity issue is usually bad news for investors