7) According to the agency problem, _________ represent the principals of a corp

Question

7) According to the agency problem, _________ represent the principals of a corporation.

A. shareholders
B. employees
C. suppliers
D. managers



8) Difficulty in finding profitable projects is due to:

A. social responsibility.
B. ethical dilemmas.
C. opportunity costs.
D. competitive markets.



9) Which of the following is NOT a principle of basic financial management?

A. Risk/return tradeoff
B. Incremental cash flow counts
C. Profit is king
D. Efficient capital markets



10) Another name for the acid test ratio is the:

A. current ratio.
B. quick ratio.
C. average collection period.
D. inventory turnover ratio.



11) Which of the following financial ratios is the best measure of the operating effectiveness of a firm’s management?

A. Current ratio
B. Gross profit margin
C. Return on investment
D. Quick ratio



12) Marshall Networks, Inc. has a total asset turnover of 2.5% and a net profit margin of 3.5%. The firm has a return on equity of 17.5%. Calculate Marshall’s debt ratio.

A. 30%
B. 40%
C. 60%
D. 50%

Explanation / Answer

7. In the agency problem, shareholders are the principals with management or the Board of Directors are the agents. They act in the best interests of the principals but sometimes they act in the best interests of themselves, hence the problem. Answer is A. 8. Difficulty in finding profitable projects is due to competitive markets or D. Firms are constantly competing for profitable projects to undertake. 9. The answer is B. All of the other three ARE principals of basic financial management. 10. The answer is B. The quick ratio and the acid test ratios are (current assets - Inventory)/(Current Liabilities) 11. The answer is C, return on invested capital or ROIC. This measure Net Income/Invested Capital. Measures how much Net Income a firm makes relative to how much capital was put into the firm to generate that Net Income. 12. Return on equity (ROE) = (NI/Sales) x (Sales/Total Assets) x (Total Assets/Equity) The first number is profit margin (Net Income/Sales), the second is Asset Turnover and the last is called Financial Leverage. if ROE = 17.4%, Net Profit Margin is 3.5%, and total Asset Turnover is 2.5x (the % is wrong in the question :P) then we set up our equation: 17.4% = 3.5% x 2.5 x (total assets/equity) and we solve for (TA/E) we get 1.99x. We can just round to 2.0x which means for every $2 in Assets we have we have $1 in equity. Since Assets = Debt + Equity, we know that 2 = Debt + 1, so that Debt equals $1. The Debt ratio is Debt/Assets, which is 1/2 or 50%. The answer to 12 is D. Hope this helps!

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