1. Maximization of shareholder wealth is a concept in which
a. Virtually all earnings are paid as dividends to common stockholders.
b. Increase earnings is of primary importance.
c. Profits are maximized on a quarterly basis
d. Optimally increasing the long-term value of the firm is emphasized.
2. Regarding risk levels, financial managers should
a. Evaluate investor’s desire for risk
b. Pursue higher risk projects because they increase value
c. Focus primarily on market fluctuations
d. Avoid higher risk projects because they destroy value
3. What is the primary goal of financial management?
a. Minimizing risk of the firm
b. Increased earnings
c. Maximizing shareholder wealth
d. Maximizing cash flow
4. An increase in investments in long-term securities will:
a. Decrease cash flow from financing activities
b. Increase cash flow from investing activities.
c. Increase cash flow from financing activities
d. Decrease cash flow from investing activities.
5. Which of the following is an inflow of cash?
a. The retirement of the firm’s bonds
b. Funds spent in normal business operations
c. The sale of the firm’s bonds
d. The purchase of a new factory
6. The statement of cash flows does NOT include which of the follow sections?
a. Cash flows from financing activities
b. Cash flows from operation activities
c. Cash flows from investing activities
d. Cash flows from sales activities
7. If a firm has both interest expense and lease payments,
a. Fixed charge coverage cannot be computed
b. Times interest earned will be smaller than fixed charge coverage
c. Times interest earned will be the same as fixed charge coverage
d. Times interest earned will be greater than fixed charge coverage
8. For a given level of profitability as measured by profit margin, the firm’s return on equity will
a. Decrease as its current ratio increases
b. Increase as its debt-to-assets ratio decreases
c. Increase as its debt-to assets ratio increases
d. Decrease as its times-interest-earned ratio decreases
9. Which of the following is not considered to be profitability ratio?
a. Times interest earned
b. Profit margin
c. Return on equity
d. Return on assets (investment)
10. In the present-of-sales method, an increase in dividends
a. More information is needed
b. Will increase required new funds
c. Has no effect on required new funds
d. Will decrease required new funds
11. In general, the larger the portion of a firm’s sales that are on credit, the
a. More the firm can buy raw materials on credit
b. Lower will be the firm’s need to borrow CLICK HERE FOR SOLUTION
c. More rapidly credit sales will be paid off
d. Higher will be the firm’s need to borrow.
12. In financial statements, the number of units shown in cost of goods sold as compared to the number of the units actually produced
a. Can be either higher or lower
b. Is higher
c. Is the same
d. Is lower 13.
A firm utilizing LIFO inventory accounting would, in calculating gross profits, assume that
a. All sales were for cash
b. All sales were from current production
c. Sales were from current production until current production was depleted, and then use sales from beginning inventory
d. All sales were from beginning inventory
14. The difference between total receipts and total payments is referred to as
a. Cash balance
b. Cumulative cash flow
c. Net cash flow
d. Beginning cash flow
15. In developing the pro forma income statement we follow four important steps:
a. Compute other expenses
b. Determine a production schedule
c. Establish a sales projection
d. Determine profit by completing the actual pro forma statement
16. What is correct order for these four steps?
a. 3, 2, 1, 4
b. 1, 2, 3, 4 CLICK HERE FOR SOLUTION
c. 2, 1, 3, 4
d. 3, 2, 4, 1
17. Firms with high degree of operating leverage are
a. Usually trading off lower levels of risk for higher profits
b. Easily capable of surviving large changes in sales volume
c. Significantly affected by changes in interest rates
d. Trading off higher fixed costs for lower per-unit variable costs
18. The degree of operating leverage is computed as
a. Percent change in volume divided by percent change in operating profit
b. Percent change in operating profit divided by percent change in net income
c. Percent change in EPS divided by percent change in operating income
d. Percent change in operating income divided by percent change in volume
19. Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?
a. Cyclical demand for the firm’s products
b. Stable industry
c. Upswing of business cycle
d. Low interest cost compared to return on assets
20. The break-even point can be calculated as
a. Fixed cost divided by contribution margin
b. Variable cost divided by contribution margin
c. Total cost divided by contribution margin
d. Variable cost times contribution margin
21. Normally, permanent current assets should be financed by
a. Internally generated funds
b. Long-term funds
c. Short-term funds
d. Borrowed funds
22. A conservatively financed firm would
a. Use long-term financing for permanent current assets and fixed assets and a portion of the short-term fluctuating assets and use short-term financing for all short=term assets
b. Use long-term financing for all fixed assets and short-term financing for all other assets
c. Finance a portion of permanent assets and short-term assets with short-term debt
d. Use equity to finance fixed assets, long-term debt to finance permanent assets, and short-term debt to finance fluctuating current assets
23. The theory of the term structure of interest rates which suggest that long-term rates are determined by the average of short-term rates expected over the time that a long-term bond is outstanding is the
a. Market average rate theory
b. Expectations hypothesis
c. Segmentation theory
d. Liquidity premium theory
24. Which of the following combinations of asset structures and financing patterns is likely to create the least volatile earnings?
a. Liquid assets and heavy short-term borrowing
b. Illiquid assets and heavy short-term borrowing
c. Illiquid assets and heavy long-term borrowing
d. Liquid assets and heavy long-term borrowing
25. An aggressive working capital policy would have which of following characteristics?
a. A short average collection period CLCIK HERE FOR SOLUTION
b. A high ratio of long-term debt to fixed assets
c. A low ratio of short-term debt to fixed asserts
d. A high ratio of short term debt to long-term sources of funds
26. Which of the following combinations of asset structures and financing patterns is likely to create the most volatile earnings?
a. Illiquid assets and heavy long-term borrowing
b. Illiquid assets and heavy short-term borrowing
c. Liquid assets and heavy short-term borrowing
d. Liquid assets and heavy long-term borrowing
27. How would electronic funds transfer affect the use of “float”?
a. Decrease its use somewhat
b. Increase its use somewhat
c. Have no effect on its use
d. Virtually eliminated its use
28. “Float” takes place because
a. The level of cash on the firms books is equal to the level cash in the bank
b. A firm is early in paying its bills
c. A customer writes “hot” checks
d. A lag exists between writing a check and clearing it through the banking system
29. Which is the following is not valid reason for holding cash?
a. To earn the highest return possible
b. To meet transaction requirement
c. To provide a compensating balance for bank
d. To satisfy emergency needs for funds
30. The three primary policy variables to consider when extending credit include all of the following except
a. The level of inflation
b. Credit standards
c. Collection policy
d. The terms of trade
31. Which of the following is not a valid quantitative measure for accounts receivable collection policies?
a. Ratio of bad debts to credit sales
b. Ratio of debt to equity
c. Average collection period
d. Aging of accounts receivables
32. Dun & Bradstreet is known for providing
a. Consumer credit reports to credit card companies
b. Cash management systems to corporate treasurers
c. Interest rate information to cash managers
d. Credit scoring reports that rank a company’s payment habits relative to its peer group.
33. Which of the following is not a method for lenders to control pledged inventory?
a. Factoring
b. Warehousing CLICK HERE FOR SOLUTION
c. Blanket inventory liens
d. Trust receipts
34. Large firms tend to be
a. Firms with low levels of inventory turnover and accounts receivable turnover
b. Firms with high levels of profitability
c. Net users of trade credit
d. Net supplies to trade credit
35. Which of the following is not a true statement about commercial paper?
a. Industrial companies, utility firms or finance companies too small to sell direct paper dealer paper b. Dealer paper is sold directly to the lender by finance company
c. Finance paper is sold directly to the lender by the finance company
d. Finance paper is also referred to as direct paper
36. Which method of controlling pledged inventory provides the greatest degree of security to the lender?
a. Warehousing
b. Trust receipts
c. Blanket inventory liens
d. Overall inventory liens
37. Firms exposed to the risk of interest rate changes may reduce that risk by
a. Hedging in the financial futures market
b. Pledging or factoring accounts receivable
c. Hedging in the commodities market
d. Obtaining a Eurodollar loan
38. Trade credit may be used to finance a major part of the firm’s working capital when
a. The firm extends more liberal credit terms than the supplier
b. Neither the firm nor the supplier extends credit
c. The firm and the supplier both extend the same credit terms
d. The firm extends less liberal credit terms than the supplier
39. As the interest rate increases, the present value of an amount to be received at the end of a fixed period
a. Decreases
b. Not enough information to tell
c. Remains the same
d. Increases
40. Increasing the number of periods will increase all of the following except
a. The present value of $1
b. The future value of an annuity
c. The future value of $1
d. The present value of an annuity
41. As the compounding rate becomes lower and lower, the future value of inflows approaches
a. The present value of the inflows
b. Need more information
c. Infinity
d. 0
42. If you invest $8,000 at 12% interest, how much will you have in 7 years?
a. $80,712
b. $3,616
c. $18,016
d. $17,688
43. If you were to put $1,000 in the bank at 6% interest each year for the next ten years, which table would you use to find the ending balance in your account?
a. Future value of an annuity of $1
b. Present value of an annuity of $1
c. Present value of $1
d. Future value of $1
44. Ali Shah sets aside 2,000 each year for 5 years. He then withdraws the funds on an equally annual basis for the next 4 years. If Ali wishes to determine the amount of the annuity to be withdrawn each year, he should use the following two tables in this order:
a. Future value of an annuity of $1; future value of a $1
b. Future value of an annuity of $1; present value of a $1
c. Present value of an annuity of $1; future value of an annuity of $1
d. Future value of an annuity of $1; present value of an annuity of $1
