Construct a balance sheet for Sophie’s Sofas given the following data. (Be sure to list the assets and liabilities in order of their liquidity.)

 

Cash balances	=	$	14,500
Inventory of sofas	=	$	245,000
Store and property	=	$	145,000
Accounts receivable	=	$	26,500
Accounts payable	=	$	21,500
Long-term debt	=	$	215,000

 

Using Table 3.7, calculate the marginal and average tax rates for a single taxpayer with the following incomes: (Do not round intermediate calculations. Round “Average tax rate” to 2 decimal places.)   The year-end 2010 balance sheet of Brandex Inc. listed common stock and other paid-in capital at $2,500,000 and retained earnings at $4,800,000. The next year, retained earnings were listed at $5,100,000. The firm’s net income in 2011 was $1,040,000. There were no stock repurchases during the year. What were the dividends paid by the firm in 2011?     You have set up your tax preparation firm as an incorporated business. You took $76,000 from the firm as your salary. The firm’s taxable income for the year (net of your salary) was $18,000. Assume you pay personal taxes as an unmarried taxpayer. Use the tax rates presented in Table 3-5 and Table 3-7.   How much taxes must be paid to the federal government, including both your personal taxes and the firm’s taxes?   By how much will you reduce the total tax bill by reducing your salary to $56,000, thereby leaving the firm with taxable income of $38,000?   The founder of Alchemy Products, Inc., discovered a way to turn lead into gold and patented this new technology. He then formed a corporation and invested $600,000 in setting up a production plant. He believes that he could sell his patent for $25 million.   a. What are the book value and market value of the firm? (Enter your answers in dollars not in millions.)   b. If there are 1 million shares of stock in the new corporation, what would be the price per share and the book value per share? (Round your answers to 2 decimal places.)     Sheryl’s Shipping had sales last year of $19,500. The cost of goods sold was $8,400, general and administrative expenses were $2,900, interest expenses were $2,400, and depreciation was $2,900. The firm’s tax rate is 30%.   a. What are earnings before interest and taxes? b. What is net income? What is cash flow from operations? Ponzi Products produced 98 chain letter kits this quarter, resulting in a total cash outlay of $12 per unit. It will sell 49 of the kits next quarter at a price of $13, and the other 49 kits in two quarters at a price of $14. It takes a full quarter for it to collect its bills from its customers. (Ignore possible sales in earlier or later quarters and assume all positive cash flow is distributed as expenses or earnings to shareholders.)   a. Prepare an income statement for Ponzi for today and for each of the next three quarters. Ignore taxes.(Leave no cells blank – be certain to enter “0” wherever required.)     b. What are the cash flows for the company today and in each of the next three quarters? (Leave no cells blank – be certain to enter “0” wherever required. Negative amounts should be indicated by a minus sign.)     c. What is Ponzi’s net working capital in each quarter? (Leave no cells blank – be certain to enter “0” wherever required.)   During the last year of operations, accounts receivable increased by $10,500, accounts payable increased by $5,500, and inventories decreased by $2,500. What is the total impact of these changes on the difference between profits and cash flow? (Input the amount as a positive value.)     Butterfly Tractors had $22.50 million in sales last year. Cost of goods sold was $9.70 million, depreciation expense was $3.70 million, interest payment on outstanding debt was $2.70 million, and the firm’s tax rate was 30%.   a. What was the firm’s net income and net cash flow? (Enter your answers in millions rounded to 2 decimal places.) b. What would happen to net income and cash flow if depreciation were increased by $2.70 million? (Input all amounts as positive values. Enter your answers in millions rounded to 2 decimal places.)   d. What would be the impact on net income and cash flow if the firm’s interest expense were $2.70 million higher. (Input all amounts as positive values. Enter your answers in millions rounded to 2 decimal places.)

Candy Canes, Inc., spends $145,000 to buy sugar and peppermint in April. It produces its candy and sells it to distributors in May for $200,000, but it does not receive payment until June. For each month, find the firm’s sales, net income, and net cash flow. (Leave no cells blank – be certain to enter “0” wherever required. Negative amounts should be indicated by a minus sign. Omit the “$” sign in your responses.)

The table below contains data on Fincorp, Inc., the balance sheet items correspond to values at year-end of 2010 and 2011, while the income statement items correspond to revenues or expenses during the year ending in either 2010 or 2011. All values are in thousands of dollars.

 

	2010	2011
Revenue	$3,800	$3,900
Cost of goods sold	1,500	1,600
Depreciation	480	500
Inventories	360	470
Administrative expenses	480	530
Interest expense	130	130
Federal and state taxes*	380	400
Accounts payable	360	470
Accounts receivable	472	570
Net fixed assets†	4,800	5,580
Long-term debt	1,800	2,200
Notes payable	1,060	720
Dividends paid	370	370
Cash and marketable securities	780	280

 

* Taxes are paid in their entirety in the year that the tax obligation is incurred.

† Net fixed assets are fixed assets net of accumulated depreciation since the asset was installed.

 

Suppose that Fincorp has 500,000 shares outstanding. What were earnings per share? (Round your answers to 2 decimal places.)

 

The table below contains data on Fincorp, Inc., the balance sheet items correspond to values at year-end of 2010 and 2011, while the income statement items correspond to revenues or expenses during the year ending in either 2010 or 2011. All values are in thousands of dollars.

 

	2010	2011
Revenue	$3,400	$3,500
Cost of goods sold	1,300	1,400
Depreciation	440	460
Inventories	380	510
Administrative expenses	440	490
Interest expense	90	90
Federal and state taxes*	340	360
Accounts payable	380	510
Accounts receivable	496	610
Net fixed assets†	4,400	5,140
Long-term debt	1,400	1,800
Notes payable	1,080	760
Dividends paid	290	290
Cash and marketable securities	740	240

 

* Taxes are paid in their entirety in the year that the tax obligation is incurred.

† Net fixed assets are fixed assets net of accumulated depreciation since the asset was installed.

 

What was the firm’s average tax bracket for each year? (Round your answers to 2 decimal places.)

 

Here are simplified financial statements of Phone Corporation from a recent year:

 

INCOME STATEMENT (Figures in millions of dollars)
Net sales	13,200
Cost of goods sold	4,110
Other expenses	4,072
Depreciation	2,548
Earnings before interest and taxes (EBIT)	2,470
Interest expense	690
Income before tax	1,780
Taxes (at 35%)	623
Net income	1,157
Dividends	866

 

BALANCE SHEET (Figures in millions of dollars)
	End of Year	Start of Year
Assets
Cash and marketable securities	90	159
Receivables	2,432	2,510
Inventories	192	243
Other current assets	872	937
Total current assets	3,586	3,849
Net property, plant, and equipment	19,983	19,925
Other long-term assets	4,226	3,780
Total assets	27,795	27,554
Liabilities and shareholders’ equity
Payables	2,574	3,050
Short-term debt	1,424	1,578
Other current liabilities	816	792
Total current liabilities	4,814	5,420
Long-term debt and leases	6,769	6,654
Other long-term liabilities	6,188	6,159
Shareholders’ equity	10,024	9,321
Total liabilities and shareholders’ equity	27,795	27,554

 

Calculate the following financial ratios: (Use 365 days in a year. Do not round intermediate calculations. Round your answers to 2 decimal places.)

Here are simplified financial statements of Phone Corporation from a recent year:

 

INCOME STATEMENT (Figures in millions of dollars)
Net sales	13,000
Cost of goods sold	3,960
Other expenses	4,037
Depreciation	2,458
Earnings before interest and taxes (EBIT)	2,545
Interest expense	675
Income before tax	1,870
Taxes (at 30%)	561
Net income	1,309
Dividends	856

 

BALANCE SHEET (Figures in millions of dollars)
	End of Year	Start of Year
Assets
Cash and marketable securities	87	156
Receivables	2,282	2,450
Inventories	177	228
Other current assets	857	922
Total current assets	3,403	3,756
Net property, plant, and equipment	19,953	19,895
Other long-term assets	4,196	3,750
Total assets	27,552	27,401
Liabilities and shareholders’ equity
Payables	2,544	3,020
Short-term debt	1,409	1,563
Other current liabilities	801	777
Total current liabilities	4,754	5,360
Long-term debt and leases	7,516	7,191
Other long-term liabilities	6,158	6,129
Shareholders’ equity	9,124	8,721
Total liabilities and shareholders’ equity	27,552	27,401

 

Phone Corp.’s stock price was $82 at the end of the year. There were 203 million shares outstanding.

 

a.	What was the company’s market capitalization and market value added? (Enter your answers in billions rounded to 2 decimal places.)

Consider the following information:

 

	Davis Chili’s	Bagwell Company
Return on equity (ROE)	15.50%	10.40%
Plowback ratio	0.48	0.83
Sustainable growth	7.00%	8.20%

 

a.	What would the sustainable growth rate be if Davis Chili’s plowback ratio rose to the same value as Bagwell Company? (Round your answer to 2 decimal places.)

What would the sustainable growth rate be if Davis Chili’s return on equity were only 14.5%? (Round your answer to 2 decimal places.)

Chik’s Chickens has average accounts receivable of $5,533. Sales for the year were $9,000. What is its average collection period? (Use 365 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Salad Daze maintains an inventory of produce worth $540. Its total bill for produce over the course of the year was $78,000. How old on average is the lettuce it serves its customers? (Use 365 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Assume a firm’s inventory level of $14,000 represents 38 days’ sales. What is the inventory turnover ratio?(Use 365 days in a year. Do not round intermediate calculations. Round your answer to 2 decimal places.)

Lever Age pays a(n) 8% rate of interest on $10.3 million of outstanding debt with face value $10.3 million. The firm’s EBIT was $1.3 million. What is times interest earned? (Round your answer to 2 decimal places.)     If depreciation is $230,000, what is cash coverage? (Round your answer to 2 decimal places.)     If the firm must retire $330,000 of debt for the sinking fund each year, what is its “fixed-payment cash-coverage ratio” (the ratio of cash flow to interest plus other fixed debt payments)? (Round your answer to 2 decimal places.)   Keller Cosmetics maintains an operating profit margin of 4.1% and asset turnover ratio of 2.1.   a. What is its ROA? (Round your answer to 2 decimal places.)   If its debt-equity ratio is 1, its interest payments and taxes are each $7,100, and EBIT is $21,900, what is its ROE? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Torrid Romance Publishers has total receivables of $3,180, which represents 20 days’ sales. Total assets are $77,380. The firm’s operating profit margin is 6.2%. Find the firm’s asset turnover ratio and ROA. (Use 365 days in a year. Do not round intermediate calculations. Round your answers to 2 decimal places.)

A firm has a long-term debt-equity ratio of 0.5. Shareholders’ equity is $1.07 million. Current assets are $256,500, and the current ratio is 1.9. The only current liabilities are notes payable. What is the total debt ratio? (Round your answer to 2 decimal places.)

A firm has a debt-to-equity ratio of 0.69 and a market-to-book ratio of 3.0. What is the ratio of the book value of debt to the market value of equity? (Round your answer to 2 decimal places.)

In the past year, TVG had revenues of $3.06 million, cost of goods sold of $2.56 million, and depreciation expense of $156,560. The firm has a single issue of debt outstanding with book value of $1.06 million on which it pays an interest rate of 8%. What is the firm’s times interest earned ratio? (Round your answer to 2 decimal places.)

Question

1. Cyberhost Corporation’s sales were $225 million last year. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

A. $271.74

B. $286.05

C. $301.10

D. $316.16

E. $331.96

N         5

I/YR    6.0%

PV       $225.00

PMT    $0.00

FV       $301.00

2. Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?

A. A project’s IRR increases as the WACC declines.

B. A project’s NPV increases as the WACC declines.

C. A project’s MIRR is unaffected by changes in the WACC.

D. A project’s regular payback increases as the WACC declines.

3. A project’s discounted payback increase Aubey Aircraft recently announced that its net income increased sharply from the previous year, yet its net cash flow from operations declined. Which of the following could explain this performance?

A. The company’s operating income declined.

B. The company’s expenditures on fixed assets declined.

C. The company’s cost of goods sold increased.

D. The company’s depreciation and amortization expenses declined.

4. Which of the following statements is CORRECT?

A. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding will decline.

B. If a security analyst saw that a firm’s days’ sales outstanding (DSO) was higher than the industry average and was also increasing and trending still higher, this would be interpreted as a sign of strength.

C. If a firm increases its sales while holding its accounts receivable constant, then, other things held constant, its days’ sales outstanding (DSO) will increase.

D. There is no relationship between the days’ sales outstanding (DSO) and the average collection period (ACP). These ratios measure entirely different things.

E. A reduction in accounts receivable would have no effect on the current ratio, but it would lead to an increase in the quick ratio.

5. Olivia Hardison, CFO of Impact United Athletic Designs, plans to have the company issue $500 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur?

A. The company’s taxable income would fall.

B. The company’s interest expense would remain constant.

C. The company would have less common equity than before.

D. The company’s net income would increase.

E. The company would have to pay less taxes.

6. One drawback of switching from a partnership to the corporate form of organization is the following:

A. It subjects the firm to additional regulations.

B. It cannot affect the amount of the firm’s operating income that goes to taxes.

C. It makes it more difficult for the firm to raise additional capital.

D. It makes the firm’s investors subject to greater potential personal liabilities.

E. It makes it more difficult for the firm’s investors to transfer their ownership interests.

7. JG Asset Services is recommending that you invest $1,500 in a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?

A. $1,781.53

B. $1,870.61

C. $1,964.14

D. $2,062.34

E. $2,165.46

N                     5

I/YR    3.5%

PV       $1,500

PMT    $0

FV       $1,781.53

8. Which of the following statements is CORRECT?

A. The maximum federal tax rate on personal income in 2010 was 50%.

B. Since companies can deduct dividends paid but not interest paid, our tax system favors the use of equity financing over debt financing, and this causes companies’ debt ratios to be lower than they would be if interest and dividends were both deductible.

C. Interest paid to an individual is counted as income for tax purposes and taxed at the individual’s regular tax rate, which in 2010 could go up to 35%, but dividends received were taxed at a maximum rate of 15%.

D. The maximum federal tax rate on corporate income in 2010 was 50%.

E. Corporations obtain capital for use in their operations by borrowing and by raising equity capital, either by selling new common stock or by retaining earnings. The cost of debt capital is the interest paid on the debt, and the cost of the equity is the dividends paid on the stock. Both of these costs are deductible from income when calculating income for tax purposes.

9. Collins Inc. is investigating whether to develop a new product. In evaluating whether to go ahead with the project, which of the following items should NOT be explicitly considered when cash flows are estimated?

A. The company will produce the new product in a vacant building that was used to produce another product until last year. The building could be sold, leased to another company, or used in the future to produce another of the firm’s products.

B. The project will utilize some equipment the company currently owns but is not now using. A used equipment dealer has offered to buy the equipment.

C. The company has spent and expensed for tax purposes $3 million on research related to the new detergent. These funds cannot be recovered, but the research may benefit other projects that might be proposed in the future.

D. The new product will cut into sales of some of the firm’s other products.

E. If the project is accepted, the company must invest $2 million in working capital. However, all of these funds will be recovered at the end of the project’s life.

10. Which of the following items cannot be found on a firm’s balance sheet under current liabilities?

A. Accounts payable.

B. Short-term notes payable to the bank.

C. Accrued wages.

D. Cost of goods sold.

E. Accrued payroll taxes.

11. Wansley Enterprises is considering a new project. The company has a beta of 1.0, and its sales and profits are positively correlated with the overall economy. The company estimates that the proposed new project would have a higher standard deviation and coefficient of variation than an average company project. Also, the new project’s sales would be countercyclical in the sense that they would be high when the overall economy is down and low when the overall economy is strong. On the basis of this information, which of the following statements is CORRECT?

A. The proposed new project would have more stand-alone risk than the firm’s typical project.

B. The proposed new project would increase the firm’s corporate risk.

C. The proposed new project would increase the firm’s market risk.

D. The proposed new project would not affect the firm’s risk at all.

E. The proposed new project would have less stand-alone risk than the firm’s typical project.

12. Which of the following would, generally, indicate animprovement in a company’s financial position, holding other things constant?

A. The total assets turnover decreases.

B. The TIE declines.

C. The DSO increases.

D. The EBITDA coverage ratio increases.

E. The current and quick ratios both decline.

12. Which of the following bank accounts has the lowest effective annual return?

A. An account that pays 8% nominal interest with monthly compounding.

B. An account that pays 8% nominal interest with annual compounding.

C. An account that pays 7% nominal interest with daily (365-day) compounding.

D. An account that pays 7% nominal interest with monthly compounding.

E. An account that pays 8% nominal interest with daily (365-day) compounding.

13. You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following statements best describes this transaction?

A. This is an example of an exchange of physical assets.

B. This is an example of a primary market transaction.

C. This is an example of a direct transfer of capital.

D. This is an example of a money market transaction.

E. This is an example of a derivatives market transaction

14. Assume that Congress recently passed a provision that will enable Barton’s Rare Books (BRB) to double its depreciation expense for the upcoming year but will have no effect on its sales revenue or tax rate. Prior to the new provision, BRB’s net income after taxes was forecasted to be $4 million. Which of the following best describes the impact of the new provision on BRB’s financial statements versus the statements without the provision? Assume that the company uses the same depreciation method for tax and stockholder reporting purposes.

A. Net fixed assets on the balance sheet will decrease.

B. The provision will reduce the company’s net cash flow.

C. The provision will increase the company’s tax payments.

D. Net fixed assets on the balance sheet will increase.

E. The provision will increase the company’s net income.

15. Considered alone, which of the following would increase a company’s current ratio?

A. An increase in net fixed assets.

B. An increase in accrued liabilities.

C. An increase in notes payable.

D. An increase in accounts receivable.

E. An increase in accounts payable.

16. Kasper Film Co. is selling off some old equipment it no longer needs because its associated project has come to an end. The equipment originally cost $22,500, of which 75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipment’s after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment’s final market value is less than its book value, the firm will receive a tax credit as a result of the sale.

A. $5,558

B. $5,850

C. $6,143

D. $6,450

E. $6,772

% depreciated on equip.75%

Tax rate                                                                       40%

Equipment cost                                                           $22,500

−Accumulated deprec                                                 16,875

Current book value of equipment                               $5,625

Market value of equipment                                         6,000

Gain (or loss):Market value − Book value                  $375

Taxes paid on gain (−) or credited (+) on loss            -150

AT salvage value = market value +/− taxes    $5,850

17. When evaluating a new project, firms should include in the projected cash flows all of the following EXCEPT:

A. Previous expenditures associated with a market test to determine the feasibility of the project, provided those costs have been expensed for tax purposes.

B. The value of a building owned by the firm that will be used for this project.

C.  decline in the sales of an existing product, provided that decline is directly attributable to this project.

D. The salvage value of assets used for the project that will be recovered at the end of the project’s life.

E. Changes in net working capital attributable to the project.

18. Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?

A. Revenues from an existing product would be lost as a result of customers switching to the new product.

B. Shipping and installation costs associated with a machine that would be used to produce the new product.

C. The cost of a study relating to the market for the new product that was completed last year. The results of this research were positive, and they led to the tentative decision to go ahead with the new product. The cost of the research was incurred and expensed for tax purposes last year.

D. It is learned that land the company owns and would use for the new project, if it is accepted, could be sold to another firm.

E. Using some of the firm’s high-quality factory floor space that is currently unused to produce the proposed new product. This space could be used for other products if it is not used for the project under consideration.

19. McPherson Company must purchase a new milling machine. The purchase price is $50,000, including installation. The machine has a tax life of 5 years, and it can be depreciated according to the following rates. The firm expects to operate the machine for 4 years and then to sell it for $12,500. If the marginal tax rate is 40%, what will the after-tax salvage value be when the machine is sold at the end of Year 4?

Year                            Depreciation Rate

1                                  0.20

2                                  0.32

3                                  0.19

4                                  0.12

5                                  0.11

6                                  0.06

A. $ 8,878

B. $ 9,345

C. $ 9,837

D. $10,355

E. $10,900

Deprec                                       Annunal                       Year-end

Year                Rate                 Basis                Deprec                         Book Value

 

1                      0.2                   $50,000           $10,000                       $40,000

2                      0.32                 50,000             16,000                         24,000

3                      0.19                 50,000             9,500                           14,500

4                      0.12                 50,000             6,000                           8,500

5                      0.11                 50,000             5,500                           3,000

6                      0.06                 50,000             3,000                           0

1.00                                         50,000

 

Gross sales proceeds(Market value)                $12,500

Book value, end of Year4                               8,500

Profit                                                               $4,000

Tax on profit Rate = 40%                               1,600

AT salvage value =market value +/-taxes      $10,900

20. Which of the following statements is CORRECT?

A. Typically, a firm’s DPS should exceed its EPS.

B. Typically, a firm’s EBIT should exceed its EBITDA.

C. If a firm is more profitable than average (e.g., Google), we would normally expect to see its stock price exceed its book value per share.

D. If a firm is more profitable than most other firms, we would normally expect to see its book value per share exceed its stock price, especially after several years of high inflation.

E. The more depreciation a firm has in a given year, the higher its EPS, other things held constant.

21. The WACC for two mutually exclusive projects that are being considered is 8%. Project K has an IRR of 20% while Project R’s IRR is 15%. The projects have the same NPV at the 8% current WACC. However, you believe that money costs and thus your WACC will also increase. You also think that the projects will not be funded until the WACC has increased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT?

A. You should delay a decision until you have more information on the projects, even if this means that a competitor might come in and capture this market.

B. You should recommend Project R, because at the new WACC it will have the higher NPV.

C. You should recommend Project K, because at the new WACC it will have the higher NPV.

D. You should recommend Project K because it has the higher IRR and will continue to have the higher IRR even at the new WACC.

E. You should reject both projects because they will both have negative NPVs under the new conditions.

22. Which of the following statements is CORRECT?

A. Borrowing by using short-term notes payable and then using the proceeds to retire long-term debt is an example of “window dressing.” Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is another example of “window dressing.”

B. Borrowing on a long-term basis and using the proceeds to retire short-term debt would improve the current ratio and thus could be considered to be an example of “window dressing.”

C. Offering discounts to customers who pay with cash rather than buy on credit and then using the funds that come in quicker to purchase additional inventories is an example of “window dressing.”

D. Using some of the firm’s cash to reduce long-term debt is an example of “window dressing.”

E. “Window dressing” is any action that improves a firm’s fundamental, long-run position and thus increases its intrinsic value.

23. Tucker Electronic System’s current balance sheet shows total common equity of $3,125,000. The company has 125,000 shares of stock outstanding, and they sell at a price of $52.50 per share. By how much do the firm’s market and book values per share differ?

A. $27.50

B. $28.88

C. $30.32

D. $31.83

E. $33.43

Shares outstanding                  125,000

Price per share                         $52.50

Total book common equity     $3,125,000

Book value per share               $25.00

Difference between book and market values$27.50

24. Which of the following statements is CORRECT?

A. It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required.

B. Corporations face fewer regulations than sole proprietorships.

C. One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level.

D. One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership.

E. If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.

25. Which of the following statements is CORRECT?

A. Capital market instruments include both long-term debt and common stocks.

B. An example of a primary market transaction would be your uncle transferring 100 shares of Wal-Mart stock to you as a birthday gift.

C. The NYSE does not exist as a physical location; rather, it represents a loose collection of dealers who trade stocks electronically.

D. If your uncle in New York sold 100 shares of Microsoft through his broker to an investor in Los Angeles, this would be a primary market transaction.

E. While the two frequently perform similar functions, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise large blocks of capital from investors.

26. Which of the following statements is CORRECT?

A. Corporations are at a disadvantage relative to partnerships because they have to file more reports to state and federal agencies, including the Securities and Exchange Administration, even if they are not publicly owned.

B. In a regular partnership, liability for the firm’s debts is limited to the amount a particular partner has invested in the business.

C. A fast-growth company would be more likely to set up as a partnership for its business organization than would a slow-growth company.

D. Partnerships have difficulty attracting capital in part because of their unlimited liability, the lack of impermanence of the organization, and difficulty in transferring ownership.

E. A major disadvantage of a partnership relative to a corporation as a form of business organization is the high cost and practical difficulty of its formation.

27. Danielle’s Sushi Shop last year had (1) a negative net cash flow from operations, (2) a negative free cash flow, and (3) an increase in cash as reported on its balance sheet. Which of the following factors could explain this situation?

A. The company had a sharp increase in its depreciation and amortization expenses.

B. The company had a sharp increase in its inventories.

C. The company had a sharp increase in its accrued liabilities.

D. The company sold a new issue of common stock.

E. The company made a large capital investment early in the year.

28. Which of the following statements is CORRECT?

A. Hedge funds are legal in Europe and Asia, but they are not permitted to operate in the United States.

B. Hedge funds have more in common with commercial banks than with any other type of financial institution.

C. Hedge funds have more in common with investment banks than with any other type of financial institution.

D. Hedge funds are legal in the United States, but they are not permitted to operate in Europe or Asia.

E. The justification for the “light” regulation of hedge funds is that only “sophisticated” investors with high net worths and high incomes are permitted to invest in these funds, and such investors supposedly can do the necessary “due diligence” on their own rather than have it done by the SEC or some other regulator.

29. Lucy’s Music Emporium opened its doors on January 1, 2012, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 20 years, but in December 2012 management realized that the assets would last for only 15 years. The firm’s accountants plan to report the 2012 financial statements based on this new information. How would the new depreciation assumption affect the company’s financial statements?

A. The firm’s reported net fixed assets would increase.

B. The firm’s EBIT would increase.

C. The firm’s reported 2012 earnings per share would increase.

D. The firm’s cash position in 2012 and 2013 would increase.

E. The firm’s net liabilities would increase.