Questions:
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
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.
An IPO is the process companies take when there are listing on an exchange for the first time.
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.
The quick ratio is a test of how much coverage, a firms current assets gives over its current liabilities. The relationship is expressed as Current Assets/Current Liabilities. Inventories and cash are part of current assets. Any changes would affect the ratio.
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
The acid-test ratio is similar to the quick ratio in many regards. However, the ratio looks at only the" liquid" assets. Liquidity is a measure of how quick an asset can be transformed into cash. Quick Ratio = (Current assets - Inventory)/Current Liabilities. Current liabilities will be given by $11400/2.6=$4385. the quick ratio will then be (114000 - 4000)/4385 =
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
Average debtors collection period = Average debtors/Sales * 360 = 74. Accounts receivable turnover = average debtors/sales.
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
An example of an organized security exchange is the New York Stock exchange (NYSE), London Stock Exchange. These exchanges are regulated by the Security Exchange commission and have all the characteristics listed above.
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.
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
A cash budget is a financial estimate of future actions. The creation, of a cash budget, involves the identification of all inflows and outflows. Once this has been matched, the financing requirements can then be estimated. Financing requirements show how much a company must borrow in order to continue its operations.
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.
Financing needs are the amount a company must borrow in order not to be short of cash. To determine financing needed the company must first evaluate its inflows and outflows for adequacy.
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
The formula for determining present value, with compounding is PV = FV/ (1+(r/t))NT. N= the number of years, T= the number of compounding periods = 12, and r = 8.5%
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.
Future value = Present value * (1 + r) n. N = 3, present value = $500 and r = 8%
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
Break-even analysis is an evaluation technique for which the objective is to determine the volume of production yielding no profits or losses. The break-even point is determined by Fixed costs/(Selling price - Variable cost).
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.
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.
Financial leverage is a measure of how a firm is financed. It shows how much debt is being taken by the company. Interest is the payment to debt instruments.
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.
IRR (internal rate of return) is a technique that determines the rate, which will equate all cash inflows with outflows.
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.
Working capital is the difference between current assets and current liabilities. If a company takes on many short-term debts, its operations may be hindered.
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.
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.
Free cash flow is the amount of cash that a company has after it has taken into consideration all operating and financing costs. If there is a decrease in sales then the total cash collected by the company would decrease.
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
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
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%
The weighted average cost of capital is derived after taking into consideration the weightings, for each finance source. Therefore WACC = 13% (5/25) + 12% (7/25) + 8% (13/25).
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
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
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
The tenet, of both the efficient frontier, in portfolio analysis and the Capital assets pricing model, is that investors are rational and will only take more risk for more returns.
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.
The efficient market hypothesis assumes that share prices are reflective of all forms of information. Under the hypothesis, there are three forms of market efficiency: weak form, semi-strong form, and strong form.
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.
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
The secondary market is the market for "confirmed" shares. The market is populated by companies that have been listed for a long time.
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.
A budget is a quantitative assessment of future actions. The difference, between the inflows and outflows shows the amount of funding required. A budget can also be used for performance evaluation.
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.
Break-even analysis, as described above, is the technique used to determine a no profit or loss position.
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
A constant uniform payment, over a period, is an annuity. The present value, of an annuity is given by
31. The NPV assumes cash flows are reinvested at the:
a. IRR
b. NPV
c. real rate of return
d. cost of capital
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
The hedging principle is a matching technique, which matches the cashflows for an asset with the costs of acquiring the asset. Current liabilities are debt that mature within a year.
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.
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.
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%
The effective interest is determined by (1 + (12%/12)) 12 - 1 = 12.68%
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.
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.
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.
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
Interest rate risk is the possibility that rates will change.
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
Treasury bills are instruments issued by the government and last for 3 - 6 months. A Commercial paper is an instrument issued by reputable companies that usually lasts less than a year.
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
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
Accounts receivables are the debtors of a firm.
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
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.
A sunk cost is an expense, on an item, place, machine etc, that has been incurred and no further benefits are expected.
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
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
47. The most expensive source of capital is:
a. preferred stock.
b. new common stock.
c. debt.
d. retained earnings.
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.
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.
A sinking fund is a fund setup in order to liquidate a liability. The company already has $3.5million and has to make payments of $3million.
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