Question 1. Financial management is concerned with which of the following?
a. Creating economic wealth
b. Making investment decisions that optimize economic value
c. Making business decisions that optimize economic wealth
d. Raising capital that is needed for growth
e. All of the above
Question 2. Purchasing a security of a company that is issuing their stock for the first time publicly would be considered:
a. a secondary market transaction.
b. an initial public offering.
c. a seasoned new issue.
d. both a and b.
Question 3. Which of the following transactions does not affect the quick ratio?
a. Land held for investment is sold for cash.
b. Equipment is purchased and is financed by a long-term debt issue.
c. Inventories are sold for cash.
d. Inventories are sold on a credit basis.
Question 4. Smith Corporation has current assets of $11,400, inventories of $4,000, and a current ratio of 2.6. What is Smith's acid test ratio?
a. 1.69
b. 0.54
c. 0.74
d. 1.35
Question 5. Smart and Smiley Incorporated has an average collection period of 74 days. What is the accounts receivable turnover ratio for Smart and Smiley? You may use a 360-day year.
a. 4.86
b. 2.47
c. 2.66
d. 1.68
Question 6. Organized security exchanges provide which of the following benefits?
a. A continuous market
b. Established and publicized fair security prices
c. Help businesses raise new capital
d. All of the above
Question 7. Which of the following is NOT a basic function of a budget?
a. Budgets indicate the need for future financing.
b. Budgets provide the basis for corrective action when actual figures differ from the budgeted figures.
c. Budgets compare historical costs of the firm with its current cost performance.
d. Budgets allow for performance evaluation.
Question 8. The preparation of a cash budget serves which of the following purposes?
a. To estimate the amount and timing of cash flows that are needed in order to optimize the price of the firm's common stock
b. To calculate the amount of future cash flows that would be needed in order to achieve the optimal level of financing during the forecast period
c. To determine the amount and timing of short-term financing that would be required for the operation of a business during the forecast period
d. To estimate the amount of sales volume that would be required in order to achieve the break-even point
Question 9. The first step involved in predicting financing needs is:
a. projecting the firm's sales revenues and expenses over the planning period.
b. estimating the levels of investment in current and fixed assets that are necessary to support the projected sales.
c. determining the firm's financing needs throughout the planning period.
d. none of the above.
Question 10. What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1).
a. $893
b. $3,106
c. $429
d. $833
Question 11. The future value of $500 deposited into an account paying 8% annually for three years is:
a. $500.
b. $630.
c. $700.
d. $620.
Question 12. Tom's Trashbins, Inc. has fixed costs of $225,000. Tom's trashbins sell for $45 and have a unit variable cost of $20. What is Tom's break-even point in units?
a. 8,500
b. 8,750
c. 9,000
d. 9,250
Question 13. Which of the following statements is correct?
a. In general, a firm with low operating leverage has a small proportion of its total costs in the form of fixed costs.
b. An increase in the personal tax rate would not affect firms' capital structure decisions.
c. A firm with high business risk is more likely to increase its use of financial leverage than a firm with low business risk, assuming all else is equal.
d. All of the above are correct.
e. None of the above is correct.
Question 14. If fixed interest expense is present in a firm's cost structure, so is:
a. financial leverage.
b. capital leverage.
c. operating leverage.
d. net operating profit after tax.
Question 15. If the IRR is greater than the required rate of return, the:
a. present value of all the cash inflows will be greater than the initial outlay.
b. payback will be less than the life of the investment.
c. project should be rejected.
d. both a and b.
Question 16. A quite risky working capital management policy would have a high ratio of:
a. short-term debt to bonds and equity.
b. short-term debt to total debt.
c. bonds to property, plant, and equipment.
d. short-term debt to equity.
Question 17. Why are domestic cash management systems less complicated than international cash management systems?
a. Domestic systems do not have to allow for currency fluctuations.
b. International cash management systems are not affected by interest rate differences.
c. International cash management systems actually are less complicated because the rest of the world's major countries are more attuned to the advantages of electronic funds transfer.
d. International cash management systems actually are less complicated because transactions are fewer but for larger sums of money.
Question 18. Which of the following would decrease free cash flows? A decrease in:
a. depreciation expense.
b. interest expense.
c. incremental sales.
d. both a & c.
e. all of the above.
Question 19. An increase in ___________ would increase the weighted average cost of capital.
a. flotation costs
b. projected dividends
c. the tax rate
d. both a and c
e. all of the above
Question 20. Which of the following best describes a firm's cost of capital?
a. The average yield to maturity on debt
b. The average cost of the firm's assets
c. The rate of return that must be earned on its investments in order to satisfy the firm's investors
d. The coupon rate on preferred stock
Question 21. Given the following information for PepsiCo, determine the company's weighted average cost of capital.
Value Cost of Capital
Restaurant Division $ 5 Billion 13%
Snack Foods Division 7 Billion 12%
Beverages Division 13 Billion 8%
a. 10.12%
b. 11.00%
c. 12.10%
d. 13.00%
Question 22. A __________ is a business combination of two companies in which the new company maintains the identity of the acquiring company.
a. consolidation
b. holding company
c. conglomerate
d. merger
Question 23. Which of the following is not a potential advantage of a merger in the United States?
a. A better financing structure
b. A better use of tax-loss carry-forwards
c. A more secure monopolization of an industry
d. A lower operating risk through diversification
Question 24. If one security has a greater risk than another security, how will investors respond?
a. They will require a lower rate of return for the investment that has greater risk.
b. They would be indifferent regarding their expectation of rates of return for either investment.
c. They will require a higher rate of return for the investment that has greater risk.
d. None of the above.
Question 25. Which of the following is a characteristic of an efficient market?
a. Small number of individuals.
b. Opportunities exist for investors to profit from publicly available information.
c. Security prices reflect fair value of the firm.
d. Immediate response occurs for new public information.
Question 26. If a company's average collection period is higher than the industry average, then the company might be:
a. enforcing credit conditions upon its customers which are too stringent.
b. allowing its customers too much time to pay their bills.
c. too tough in collecting its accounts.
d. too liquid.
Question 27. If an investor were to sell 100 shares of Microsoft stock to another investor in the securities market, this would be referred to as what type of transaction?
a. A primary market transaction
b. A secondary market transaction
c. A money market transaction
d. A futures market transaction
Question 28. Which of the following is NOT a basic function of a budget?
a. Budgets indicate the need for future financing.
b. Budgets provide the basis for corrective action when actual figures differ from the budgeted figures.
c. Budgets compare historical costs of the firm with its current cost performance.
d. Budgets allow for performance evaluation.
Question 29. Break-even analysis can be useful in:
a. capital expenditure analysis.
b. bond refunding decisions.
c. rights offering decisions.
d. all of the above.
Question 30. What is the value today of an investment that pays $500 every year at year-end during the next 15 years if the annual interest rate is 9%?
a. $4,030.50
b. $7,500.00
c. $3,500.00
d. $7,000.00
Question 31. The NPV assumes cash flows are reinvested at the:
a. IRR.
b. NPV.
c. real rate of return.
d. cost of capital.
Question 32. With regard to the hedging principle, which of the following assets should be financed with current liabilities?
a. Minimum level of cash required for year-round operations
b. Expansion of accounts receivable to meet seasonal demands
c. Machinery used to produce a firm's inventory
d. Both a and b
e. Both b and c
Question 33. With respect to working capital policy, firms most often employ:
a. a cautious approach which finances short-term assets with long-term financing.
b. the hedging principle.
c. an aggressive approach which finances long-term assets with short-term financing.
d. a mixture of all of the above.
Question 34. Under a field warehouse financing agreement:
a. collateral inventories are physically separated from other inventories of the borrower.
b. collateral inventories are placed under the control of a third party.
c. a warehouse receipt is issued which might or might not be negotiable.
d. all of the above.
Question 35. The Omega Corp. plans to borrow $10,000 for a 60-day period. At maturity, Omega will repay the $10,000 principal plus interest at an annual rate of 12%. What is the effective rate of interest on this loan?
a. 12.62%
b. 12.13%
c. 11.47%
d. 11.22%
Question 36. All else equal, which of the following is the most likely to occur if actual sales are much less than forecasted sales?
a. The company will be in a better position to pay down most of its debt.
b. The firm's actual investment in inventory will be unchanged from the amount forecasted.
c. Accounts receivable will rise significantly above the forecast.
d. The company might face a cash flow crunch.
Question 37. Given that short-term interest rates typically fluctuate more than long-term rates, interest rate risk is least for:
a. Treasury bills.
b. common stock.
c. long-term government bonds.
d. medium-term corporate bonds.
Question 38. Money market funds:
a. are one of the oldest forms of mutual funds.
b. typically invest in a diversified portfolio of short-term, high-grade debt instruments.
c. are generally very profitable but fail to provide liquidity to the small investor.
d. typically sell shares to the public in $5,000 denominations.
Question 39. Which of the following has the least interest rate risk?
a. A six-month unsecured promissory note from International Harvester
b. An eight-year investment certificate from a federally insured bank
c. A 15-year U.S. Treasury bond
d. An AT&T bond maturing in 2010
Question 40. Which of the following generally have maturities of one year or less?
a. Treasury bills
b. Money market mutual fund
c. Commercial paper
d. Both a and c
e. All of the above
Question 41. Which of the following is a category of inventory?
a. Raw materials
b. Work-in-progress
c. Finished goods
d. All of the above
Question 42. Which of the following influences the amount of investment a firm will have tied up in accounts receivable?
a. Terms of sale
b. Volume of credit sales
c. Collection efforts
d. Credit-worthiness of customers
e. All of the above
Question 43. Which of the following cash flows are not considered in the calculation of the initial outlay for a capital investment proposal?
a. Training expense
b. Working capital investments
c. Installation costs of an asset
d. Before-tax selling price of old machine
Question 44. XYZ, Inc. is considering adding a product line that would utilize unused floor place of their manufacturing plant. The floor space would be considered a(n):
a. variable cost.
b. opportunity cost.
c. sunk cost.
d. irrelevant cash flow.
Question 45. What is the capital budgeting term that is used to refer to more than one investment alternative that performs the same function?
a. Simulated
b. Capital rationed
c. Mutually exclusive
d. Opportunistic
Question 46. Which of the following best describes why cash flows are utilized rather than accounting profits when evaluating capital projects?
a. Cash flows have a greater present value than accounting profits.
b. Cash flows reflect the timing of benefits and costs more accurately than accounting profits.
c. Cash flows are more stable than accounting profits.
d. Cash flows improve the tax position of a firm more than accounting profits.
e. None of the above.
Question 47. The most expensive source of capital is:
a. preferred stock.
b. new common stock.
c. debt.
d. retained earnings.
Question 48. A company has a capital structure that consists of 50% debt and 50% equity. Which of the following is true?
a. The weighted average cost of capital is less than the cost of equity financing.
b. The cost of equity financing is greater than the cost of debt financing.
c. The weighted average cost of capital is calculated on a before-tax basis.
d. Both a and b.
c. All of the above.
Question 49. Typically, Delta, Inc. maintains $1 million in cash and marketable securities. The firm currently is expecting an economic recession and projects that its net cash flows from operations during the period will be $2.5 million. Delta expects annual interest and sinking fund payments will be $3 million during the period. If the recession occurs, Delta's cash balance at the end of the period will be:
a. $6.5 million.
b. $1 million.
c. $500,000.
d. $3.5 million.
Question 50. Which of the following is not a component of a firm's capital structure?
a. Preferred stock
b. Bonds
c. Common stock
d. Accounts payable
e. Retained earnings