Multiple Choice Questions 1. What is the primary goal of financi.docx

Multiple Choice Questions
1. What is the primary goal of financial management?
A) Increased earnings
B) Maximizing cash flow
C) Maximizing shareholder wealth
D) Minimizing risk of the firm
Difficulty: Easy Type: Memorization
2. The partnership form of organization
A) avoids the double taxation of earnings and dividends found
in the corporate form of organization.
B) usually provides limited liability to the partners.
C) has unlimited life.
D) simplifies decision making.
3. Increased productivity due to technology has
A) increased corporations' reliance on debt for capital
expansion needs.
B) created larger asset values on the firm's historical balance
sheet.
C) made it cheaper (in terms of interest costs) for firms to
borrow money.
D) helped to keep corporate costs in check.
Difficulty: Medium Type: Conceptual
4. Insider trading occurs when

A) someone has information not available to the public which
they use to profit from trading in stocks.
B) corporate officers buy stock in their company.
C) lawyers, investment bankers, and others buy common stock
in companies represented by their firms.
D) any stock transactions
occur in violation of the Federal Trade Commissions
restrictions on monopolies.
Difficulty: Medium Type: Memorization
Chapter 2 Review of Accounting
5. When a firm's earnings are falling more rapidly than its
stock price, its P/E ratio will:
A) remain the same
B) go up
C) go down
D) could go either up or down
6. The net worth of a firm
A) is usually the same as the firm's market value.
B) is based on current asset costs.
C) is based on current liabilities.
D) none of the above.
Difficulty: Medium Type: Application

7. A statement of cash flows allows a financial analyst to
determine
A) whether a cash dividend is affordable.
B) how increases in asset accounts have been financed.
C) whether long-term assets are being financed with long-term
or short-term financing.
D) all of the above
8. A firm has $200,000 in current assets, $400,000 in long-term
assets, $80,000 in current liabilities, and $200,000 in long-term
liabilities. What is its net working capital?
A) $120,000
B) $320,000
C) $520,000
D) none of the above
Chapter 3 Financial Analysis
Multiple Choice Questions
9. The ______________ method of inventory costing is least
likely to lead to inflation-induced profits.
A) FIFO
B) LIFO
C) Weighted average

D) Lower of cost or market
10. The Bubba Corp. had net income before taxes of $200,000
and sales of $2,000,000. If it is in the 50% tax bracket its
after-tax profit margin is:
A) 5%
B) 12%
C) 20%
D) 25%
11. XYZ's receivables turnover is 10x. The accounts
receivable at year-end are $600,000. The average collection
period is 90 days (3 months). What was the sales figure for the
year?
A) $60,000
B) $6,000,000
C) $24,000,000
Difficulty: Hard Type: Application
12. A firm has total assets of $2,000,000. It has $900,000 in
long-term debt. The stockholders equity is $900,000. What is
the total debt to asset ratio?
A) 45%
B) 40%
C) 55%

Chapter 4 Financial Forecasting
13. Required production during a planning period will depend
on the
A) beginning inventory of products.
B) sales during the period.
C) desired level of ending inventory.
D) all of the above
14. XYZ Co. has forecasted June sales of 600 units and July
sales of 1000 units. The company maintains ending inventory
equal to 125% of next month's sales. June beginning inventory
reflects this policy. What is June's required production?
A) 1100 units
B) -0- units
C) 500 units
D) 400 units
15. The difference between total receipts and total payments
referred to as
A) cumulative cash flow.
B) beginning cash flow.
C) net cash flow.
D) cash balance.

Difficulty: Easy Type: Conceptual
16. In developing the pro forma income statement we follow
four important steps:
1) compute other expenses,
2) determine a production schedule,
3) establish a sales projection,
4) determine profit by completing the actual pro forma
statement.
What is the correct order for these four steps?
A) 1,2,3,4
B) 4,3,2,1
C) 2,1,3,4
D) 3,2,1,4
Chapter 5 Operating and Financial Leverage
17. In break-even analysis the contribution margin is defined as
A) sales minus variable costs.
B) sales minus fixed costs.
C) variable costs minus fixed costs.
D) fixed costs minus variable costs.
18. Firm A employs a high degree of operating leverage; Firm
B takes a more conservative approach. Which of the following
comparative statements about firms A and B is true?
A) A has a lower break-even point than B, but A's profit grows
faster after the break-even.
B) A has a higher break-even point than B, but A's profit grows
slower after the break-even.

C) B has a lower break-even point than
A, but A's profit grows faster after break-even.
D) B has a lower break-even point than A, and profit grows the
same rate for both companies after the breakeven point.
19. Heavy use of long-term debt may be beneficial in an
inflationary economy because
A) the debt may be repaid in more "expensive" dollars.
B) nominal interest rates exceed real interest rates.
C) inflation is associated with the peak of a business cycle.
D) the debt may be repaid in "cheaper" dollars.
20. Under which of the following conditions could the overuse
of financial leverage be detrimental to the firm?
A) Stable industry
B) Cyclical demand for the firm's products.
C) Upswing of business cycle.
D) Low interest cost compared to return on assets
Chapter 6 Working Capital and the Financial Decision
21. Risk exposure due to heavy short-term borrowing can be
compensated for by
A) carrying highly liquid assets.
B) carrying illiquid assets.
C) carrying longer term, more profitable current assets.
D) carrying more receivables to increase cash flow.

22. When actual sales are greater than forecasted sales
A) inventory will decline.
B) production schedules might have to be revised upward.
C) accounts receivable will rise.
D) all
of the above
23. Yield curves change daily to reflect
A) changing conditions in the money and capital markets.
B) new inflation expectations.
C) changing conditions in the overall economy.
D) all of the above.
24. Retail companies like Target and Limited Brands are more
likely to have
A) stable sales and earnings per share.
B) cyclical sales but less volatile earnings per share.
C) cyclical sales and more volatile earnings per share.
D) cyclical sales but stable accounts receivable and inventory.
Chapter 7 Current Asset Management
25. When using the economic order quantity model
A) ordering costs increase as the level of inventory increases.
B) carrying costs decrease as the level of inventory increases.

C) costs are minimized when total carrying costs and total
ordering costs are equal.
26. Hedging
A) is a way to protect your accounts receivable position.
B) increases risk.
C) is a legal agreement to buy or sell a financial futures
contract.
D) can be carried out with a futures contract.
27. Which of the following is not a true statement about
commercial paper?
A) Finance paper is sold directly to the lender
by the finance company.
B) Finance paper is also referred to as direct paper.
C) Dealer paper is sold directly to the lender by a finance
company.
D) Industrial companies, utility firms or finance companies too
small to sell direct paper sell dealer paper.
28. Which of the following best describes the benefits to the
borrower of selling asset backed securities?
A) Due to the portfolio effect, the borrower can package up low
quality accounts receivable and sell them for a premium price.
B) The borrower trades future cash flows for current cash
flows.
C) The asset-backed security is likely to carry a high credit

rating of AA or better.
D) b and c are correct.
29. Price Corp. is considering selling to a group of new
customers and creating new annual sales of $70,000. 5% will
be uncollectible. The collection cost on these accounts is 3.5%
of new sales, the cost of producing and selling is 80% of sales
and the firm is in the 31% tax bracket. What is the profit on
new sales?
A) $5,554.50
B) $9,660.00
C) $7,245.00
Chapter 8 Sources of Short-Term Financing
30. Mr. Jones borrows $2,000 for 90 days and pays $35
interest. What is his effective rate of interest?
A) 9.3%
B) 7.0%
C) 11.7%
D) None of the above
Difficulty: Medium Type:
Application
31. The prime rate
A) is the effective rate of interest for banks' best customers.

B) has been quite volatile during the past two decades, moving
as much as 8 percentage points in a 12-month period.
C) is usually lower than treasury bill rates.
32. Accounts receivable may be used as a source of financing
by
A) pledging the receivables as loan collateral.
B) factoring the receivables to a finance company.
C) selling securities backed by the receivables.
D) all of the above
33. The required compensating balance is usually computed as
a
A) percentage of customer loans outstanding.
B) factor of accounts receivable.
C) percentage of the bank's commitments toward future loans.
D) a and c are correct
Chapter 9 The Time Value of Money
34. The concept of time value of money is important to
financial decision making because
A) it emphasizes earning a return on invested capital.
B) it recognizes that earning a return makes $1 worth more
today than $1 received in the future.

C) it can be applied to future cash flows in order to compare
different streams of income.
D) all of the above
35. Mr. Nailor invests $5,000 in a certificate of deposit at his
local
bank. He receives annual interest of 8% for 7 years. How
much interest will his investment earn during this time period?
A) $2,915
B) $3,570
C) $6,254
D) $8,570
36. Mr. Fish wants to build a house in 10 years. He estimates
that the total cost will be $170,000. If he can put aside
$10,000 at the end of each year, what rate of return must he
earn in order to have the amount needed?
A) Between 11% and 12%
B) Between 8% and 9%
C) 17%
D) None of the above
Chapter 10 Valuation and Rates of Return
37. A 20-year bond pays 12% on a face value of $1,000. If
similar bonds are currently yielding 9%, What is the market
value of the bond? Use annual analysis.

A) over $1,000
B) under $1,000
C) over $1,200
D) not enough information given to tell
Difficulty: Easy Type: Application
38. An issue of preferred stock is paying an annual dividend of
$5. The growth rate for the firm's common stock is 14%.
What is the preferred stock price if the required rate of return is
11%?
A) $45.45
B) $41.67
C) $35.71
39. Which of the following does not influence the yield to
maturity for a security?
A) required real rate of return
B) risk free rate
C) business risk
D) yields of similar securities
Difficulty:
Medium Type: Conceptual
40. The cost of common stock is usually greater than the simple
dividend yield because
A) investors perceive risk in common stock.
B) investors expect both a current dividend and future growth.
C) dividends are not tax-deductible.
D) the company must make profits before it can pay dividends.

41. The dividend valuation model stresses the
A) importance of earnings per share.
B) importance of dividends and legal rules for maximum
payment.
C) relationship of dividends to market prices.
D) relationship of dividends to earnings per share.
Chapter 11 Cost of Capital
42. Although debt financing is usually the cheapest component
of capital, it cannot be used to excess because
A) interest rates may change.
B) the firm's stock price will increase and raise the cost of
equity financing.
C) the financial risk of the firm may increase and thus drive up
the cost of all sources of financing.
D) underwriting costs may change.
43. Each project should be judged against
A) the specific means of financing used to support its
implementation.
B) the going interest rate at that point in time.
C) the cost of new common stock equity.

44. The cost of debt is
determined by taking the
A) present value of the interest payments and principal times
one minus the tax rate.
B) historical yield on bonds times one minus the tax rate
C) estimated yield on new bond issues of the same risk times
one minus the shareholder marginal tax rate.
45. The pre-tax cost of debt for a new issue of debt is
determined by
A) the investor's required rate of return on issued stock.
B) the coupon rate of existing debt.
C) the yield to maturity of outstanding bonds.
D) all of the above.
Chapter 14 Capital Markets
46. During the next ten years, the major threat to the
dominance of the U.S. money and capital markets will come
from
A) Russia's difficulty in transforming its economy into a
capitalistic one.
B) Japan's prolonged recession and banking crisis.
C) The Euro-zone countries comprising the European Monetary
Union and a single currency.

D) The huge Chinese economy and its billion plus people.
47. With respect to the United States and its relationship with
the rest of the world, it can be said that
A) the U.S. has invested more dollars in the rest of the world
than foreign countries have invested in the U.S.
B) the U.S. has actively helped foreign countries finance the
government deficits.
C) foreign investors hold
large positions in U.S. government securities.
D) All of the above.
48. Financial instruments in the capital markets generally fall
under what category in the Balance Sheet?
A) Short-term liabilities and equities.
B) Long-term liabilities and equities.
C) Near cash assets.
D) None of the above.
Chapter 16 Long-Term Debt and Lease Financing
49. With regard to interest rates and bond prices it can be said
that
A) a 1% change in interest rates will cause a greater change in
long-term bond prices than short-term prices.
B) a 1% change in interest rates will cause a greater change in
short-term bond prices than long-term prices.

C) long-term rates are more volatile than short-term rates.
D) a decrease in interest rates will cause bond prices to fall.
50. Which one of these conditions must be met for a lease to
qualify as a capital lease?
A) The lease contains a bargain purchase price at the end of the
lease.
B) The lease must have a value of at least $10 million.
C) The lease must have a life of 10 years.
D) All of the above.
Chapter 17 Common and Preferred Stock Financing
51. Which of the following is not a true statement?
A) Common stockholders have a residual claim to income.
B) Bondholders
may force a corporation into bankruptcy for failure to make
interest payments.
C) Common stockholders are legally entitled to some dividend.
D) A minority interest can still elect members to the Board of
Directors under cumulative voting even though someone else
owns 51% of the stock.
52. Kuhns Corp. has 200,000 shares of preferred stock
outstanding that is cumulative. The dividend is $6.50 per share
and has not been paid for 3 years. If Kuhns earned $3 million
this year, what could be the maximum payment to the preferred

stockholders on a per share basis?
A) $19.50 per share
B) $15.00 per share
C) $13.00 per share
D) $6.50 per share
53. When comparing common stock of the same company it is
fair to say that
A) all shares, no matter how many classes, are all created with
the same equal rights.
B) companies sometimes have two different classes of shares
with unequal rights to dividends and votes.
C) the Securities and Exchange Commission allows only one
class of common stock.
D) investors are indifferent between class A and class B shares.
54. Dr. J. wants to buy an IBM personal computer which will
cost $2,788 four years from today. He would like to set aside
an equal amount at the end of each year in order to accumulate
the amount needed. He can earn 7% annual return.
How much should he set aside?
A) $697.00
B) $627.93
C) $823.15
D) $531.81
Problems to be solved-Chapter 2

55. The following is the December 31, 2003 balance sheet for
the Epics Corporation.
Assets Liabilities
Cash $ 70,000 Accounts Payable $ 100,000
Accounts Receivable 150,000 Notes Payable 120,000
Inventory 280,000 Bonds Payable 300,000
Total Current Assets $ 500,000 Total Liabilities $ 520,000
Plant and Equipment $1,250,000 Equity
Less: Accum. Deprec. 250,000 Common Stock 300,000
Net plant and Equipment $1,000,000 Paid In Capital 200,000
Retained Earnings 480,000
Total Assets $1,500,000 Total Equity $ 980,000
Total Liab. & Equity $1,500,000
Sales for 2003 were $2,000,000, with the cost of goods sold
being 55% of sales. Depreciation expense was 10% of the
gross plant and equipment at the beginning of the year.
Interest expense was 9% on the notes payable and 11% on the
bonds payable. Selling and administrative expenses were
$200,000 and the firm's tax rate is 40%.
Prepare an income statement.
Difficulty: Medium
Answer:
56. Given the financial information for the A.E. Neuman
Corporation,

a) Prepare a Statement of Cash Flows for the year ended
December 31, 2002.
b) What is the dividend payout ratio for 2003?
c) If we increased the dividend payout ratio to 100%, what
would happen to retained earnings?
Difficulty: Medium to Hard
Answer:

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