Finance 550

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Practice Exam Questions and Answers

1. The Widget Co. purchased new machinery three years ago for $4 million. The machinery can be sold to the Roman Co. today for $2 million. The Widget Co.'s current balance sheet shows net fixed assets of $2,500,000, current liabilities of $1,375,000, and net working capital of $725,000. If all the current assets were liquidated today, the company would receive $1.9 million in cash. The book value of the Widget Co.'s assets today is _____ and the market value of those assets is _____.
A. $4,600,000; $3,900,000
B. $4,600,000; $3,125,000
C. $5,000,000; $3,125,000
D. $5,000,000; $3,900,000
E. $6,500,000; $3,900,000

Book value = ($725,000 + $1,375,000) + $2,500,000 = $4,600,000
Market value = $1,900,000
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good reputation of the company
C. equipment owned by the firm
D. money due from a customer
E. an item held by the firm for future sale

Refer to section 2.1

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 2-2 and 2-4
Ross - Chapter 02 #15
Section: 2.2 and 2.4
Topic: Depreciation

10. Which one of the following statements concerning net working capital is correct?
A. The lower the value of net working capital the greater the ability of a firm to meet its current obligations.
B. An increase in net working capital must also increase current assets.
C. Net working capital increases when inventory is sold for cash at a profit.
D. Firms with equal amounts of net working capital are also equally liquid.
E. Net working capital is a part of the operating cash flow.

Refer to section 2.1

AACSB: N/A
Bloom's: Comprehension
Difficulty: Intermediate
Learning Objective: 2-2 and 2-4
Ross - Chapter 02 #19
Section: 2.2 and 2.4
Topic: Income statement

11. The higher the degree of financial leverage employed by a firm, the:
A. higher the probability that the firm will encounter financial distress.
B. lower the amount of debt incurred.
C. less debt a firm has per dollar of total assets.
D. higher the number of outstanding shares of stock.
E. lower the balance in accounts payable.

Refer to section 2.1

AACSB: N/A
Bloom's: Knowledge
Difficulty: Basic
Learning Objective: 2-4
Ross - Chapter 02 #24
Section: 2.4
Topic: Cash flow from
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