1. Retained earnings are:
A) The amount of cash that the firm has saved up
B) The difference between the market price of the stock and the book value
C) The difference between the net income earned and the dividends paid during a year
D) The amount of directly contributed equity capital in excess of par value
Answer: C Type: Easy Page: 361
2. Internally generated cash is calculated as:
(I) Retained earnings
(II) Interest payments
(II) Depreciation
A) (I - II)
B) (I + II)
C) (I + III)
D) (I - III)
Answer: C Type: Easy Page: 361
3. Generally (during the years 1989-2003), non-financial US corporations have financed their capital expenditures mostly through:
A) By issuing new equity
B) Debt
C) Working capital
D) Internally generated cash
Answer: D Type: Easy Page: 362
4. 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
A) I only
B) II only
C) II and III only
D) I,II, and III
Answer: D Type: Easy Page: 363
5. 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.
A) 40%
B) 20%
C) 50%
D) None of the above
Answer: C Type: Easy Page: 364
Response: Debt ratio = (200+100)/600 = 0.5 or 50%
6. On the average, firms of the following countries have higher levels of debt to total capital ratios (after adjusting for accounting differences) except:
