Question 1. Which of the following statements best represents what finance is about?
a. How political, social, and economic forces affect corporations
b. Maximizing profits
c. Creation and maintenance of economic wealth
d. Reducing
Question 2. The goal of the firm should be:
a. Maximization of profits.
b. Maximization of shareholder wealth.
c. Maximization of consumer satisfaction.
d. Maximization of sales.
Question 3. The debt ratio is a measure of a firm's:
a. leverage.
b. profitability.
c. liquidity.
d. efficiency.
Question 4. If you were given the components of current assets and of current liabilities, what ratio(s) could you compute?
a. Quick ratio
b. Average collection period
c. Current ratio
d. Both a and c
e. All of the above
Question 5. What is the most important ingredient in developing a firm's financial plan?
a. A forecast of sales revenues
b. Determining the amount of dividends to pay shareholders
c. Projecting the rate of interest on proposed new debt
d. Deciding upon which method of depreciation a firm should utilize
Question 6. The percent-of-sales method can be used to forecast:
a. expenses.
b. assets.
c. liabilities.
d. all of the above.
Question 7. At 8% compounded annually, how long will it take $750 to double?
a. 6.5 years
b. 48 months
c. 9 years
d. 12 years
Question 8. You wish to borrow $2,000 to be repaid in 12 monthly installments of $189.12. The annual interest rate is:
a. 24%.
b. 8%.
c. 18%.
d. 12%.
Question 9. Green Corp.'s preferred stock is selling for $20.83. If the company pays $2.50 annual dividends, what is the expected rate of return on its stock?
a. 8.33%
b. 12.00%
c. 2.50%
d. 20.00%
Question 10. Sacramento Light & Power issued preferred stock in 1998 that had a par value of $85. The preferred stock pays a dividend of 5.75%. Investors require a rate of return of 6.50% today on this stock. What is the value of the preferred stock today? Round to the nearest $1.
a. $100
b. $85
c. $75
d. $16
Question 11. The NPV method:
a. is consistent with the goal of shareholder wealth maximization.
b. recognizes the time value of money.
c. uses cash flows.
d. all of the above.
Question 12. The NPV assumes cash flows are reinvested at the:
a. IRR.
b. NPV.
c. real rate of return.
d. cost of capital.
Question 13. Which of the following techniques may not consider ALL cash flows of a project?
a. Net present value
b. Internal rate of return
c. Payback period
d. Modified internal rate of return
Question 14. Which of the following is not considered in the calculation of incremental cash flows?
a. Depreciation tax shield
b. Sunk costs
c. Opportunity costs
d. Both a & b
Question 15. Cost of capital is:
a. the coupon rate of debt.
b. a hurdle rate set by the board of directors.
c. the rate of return that must be earned on additional investment if firm value is to remain unchanged.
d. the average cost of the firm's assets.
Question 16. The average cost associated with each additional dollar of financing for investment projects is:
a. the incremental return.
b. the marginal cost of capital.
c. risk-free rate.
d. beta.
Question 17. Capital market instruments include:
a. negotiable certificates of deposit.
b. corporate equities.
c. preferred stock.
d. both b and c.
e. all of the above.
Question 18. Which of the following would increase the need for external equity?
a. Inadequate investment opportunities
b. A slow-down in economic growth
c. A reduction in corporate profits
d. A seasonal reduction in sales revenues
Question 19. The break-even model enables the manager of the firm to:
a. calculate the minimum price of common stock for certain situations.
b. set appropriate equilibrium thresholds.
c. determine the quantity of output that must be sold to cover all operating costs.
d. determine the optimal amount of debt financing to use.
Question 20. Fixed costs include all of the following EXCEPT:
a. administrative salaries.
b. property taxes.
c. sales commissions.
d. insurance.
Question 21. Financial leverage is distinct from operating leverage since it accounts for the use of:
a. debt.
b. fixed operating costs.
c. preferred stock.
d. both a and c.
e. all of the above.
Question 22. Which two ratios would be most helpful in managing a firm's capital structure?
a. Balance sheet leverage ratios and profitability ratios
b. Leverage ratios and coverage ratios
c. Coverage ratios and liquidity ratios
d. Coverage ratios and profitability ratios
Question 23. The focus of current asset management is on:
a. property, plant, and equipment acquisition.
b. cash, accounts receivable, and inventory levels.
c. investments in marketable securities.
d. both a and c.
e. all of the above.
Question 24. An increase in ___________ would increase net working capital.
a. plant and equipment
b. accounts payable
c. accounts receivable
d. both b and c
Question 25. Which of the following would increase cash flow for a firm?
a. Purchase of marketable securities
b. Purchase of fixed assets
c. Credit sales
d. Cash sales
Question 26. A company is technically insolvent when:
a. cash outflows in a given period are greater than cash inflows.
b. earnings before interest payments are less than the interest payments.
c. it lacks the necessary liquidity to promptly pay its current debt obligations.
d. the current ratio is less than 1.0.
Question 27. Carrying cost on inventory includes:
a. the required rate of return on investment in total assets.
b. wages of warehouse employees.
c. cost associated with inventory shrinkage.
d. both b and c.
e. all of the above.
Question 28. A firm's credit and collection policies usually include:
a. terms of sale, quality of customers, and collection of credit sales.
b. average collection period, dollar value of aged receivables, and terms of sales.
c. terms of sale and collection of credit sales.
d. terms of sale, level of credit sales, and collection of credit sales.
Question 29. Some complexities of conducting international business include:
a. multiple currencies.
b. differing legal requirements.
c. external control problems.
d. both a and b.
e. all of the above.
Question 30. A spot transaction occurs when one currency is:
a. deposited in a foreign bank.
b. immediately exchanged for another currency.
c. exchanged for another currency at a specified price.
d. traded for another at an agreed-upon future price.