True or False Questions
1. Financial management is concerned with the maintenance and creation of wealth.
2. The current ratio and the acid test ratio are both measures of financial leverage.
3. Sales occurring in the secondary markets increase the total stock of financial assets that exist in the economy.
4. The key ingredient in a firm's financial planning is the sales forecast.
5. The present value of an annuity increases as the discount rate increases.
6. As the volume of production increases, the fixed cost per unit of the productdecreases.
7. Whenever the IRR on a project equals that project's required rate of return, the NPV equals zero.
8. The hedging principle involves matching the cash flow from an asset with the cash flow requirements of the financing used.
9. Because they operate within a highly uncertain environment, utilities hold a large percentage of their total assets in cash.
10. Accounts receivable are an asset that reflects sales made on credit.
11. Working capital for a project includes investment in fixed assets.
12. Sales captured from the firm's competitors can be relevant to the capital-budgeting decision.
13. The weighted average cost of capital is the minimum required return that must be earned on additional investment if firm value is to remain unchanged.
14. The firm financed completely with equity capital has a cost of capital equal to the required return on common stock.
15. Financial structure includes long-term and short-term sources of funds.
16. Real assets should be financed with temporary capital due to the short-term nature of depreciation expense.
17. The nature of a firm's assets has a major influence on the types of financial capital a firm uses.
18. Compared with other developed countries, the U.S. is particularly reliant on foreign trade for self-subsistence.
19. The foreign exchange market is similar in form to the New York Stock Exchange.
20. The efficiency of foreign currency markets is ensured, in large measure, by the process of arbitrageurs.
21. Foreign currency forward rates aid traders by reducing uncertainty regarding future market fluctuations.
22. Capital markets in foreign countries in general are becoming more integrated due to the widespread availability of interest rate and currency swaps.
Multiple Choice Questions
23. 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 Risk
24. Which of the following factors enable a public corporation to grow to a greater extent, and perhaps at a faster rate, than a partnership or a proprietorship?
a. Unlimited liability of shareholders
b. Access to the capital markets
c. Limited life
d. Elimination of double taxation on corporate income
e. All of the above
25. Which of the following decrease new competition in competitive markets?
a. Economies of scale
b. Proprietary technology
c. Product differentiation
d. Both a and b
e. All of the above
26. Kingsbury Associates has current assets as follows:
Cash $3,000
Accounts receivable $4,500
Inventories $8,000
If Kingsbury has a current ratio of 3.2, what is its quick ratio?
a. 2.07
b. 1.55
c. 0.48
d. 0.96
27. Millers Metalworks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The total debt ratio for the firm is 50%. Calculate Millers's return on equity.
a. 17.5%
b. 19.5%
c. 21.5%
d. 23.5%
28. Which of the following is not a driving force of the operating profit margin?
a. The average selling price for each product
b. The ability to control all of the firm's expenses
c. The ability to control general and administrative expenses
d. The number of units of product sold
29. Where is the availability of prices most continuous?
a. Organized exchanges
b. OTC
c. FRB
d. NASDAQ
30. Which of the following refers to the institutions and procedures that provide for transactions in short-term debt instruments?
a. Capital market
b. Commercial banks
c. Money market
d. Stock market
31. A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in November. How much money is expected to be collected in October?
a. $25,000
b. $15,000
c. $35,000
d. None of the above
32. Which of the following is a source of external capital?
a. Retained earnings
b. Inventory
c. Long-term debt
d. Operating income (earnings before interest and taxes)
e. None of the above
33. Which of the following expenses should be included as a cash outlay in the preparation of a cash budget?
a. The payment of accounts payable
b. The payment of depreciation expense
c. The payment of accrued income taxes
d. All of the above
e. None of the above
34. 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
35. 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%.
36. Which of the following formulas represents the future value of $500 invested at 8% compounded quarterly for five years?
a. 500(1+.08)5
b. 500(1+.08)20
c. 500(1+.02)5
d. 500(1+.02)20
37. Which of the following is NOT an example of variable costs?
a. Packaging
b. Depreciation
c. Direct labor
d. Freight costs on products
38. Financial leverage means financing some of a firm's assets with:
a. commercial paper.
b. preferred stock.
c. corporate bonds.
d. all of the above.
39. The NPV assumes cash flows are reinvested at the:
a. IRR.
b. NPV.
c. real rate of return.
d. cost of capital.
40. A project has an initial outlay of $4,000. It has a single payoff at the end of Year 4 of $6,996.46. What is the IRR for the project (round to the nearest percent)?
a. 16%
b. 13%
c. 21%
d. 15%
41. An increase in ___________________ would increase a firm's liquidity.
a. notes payable
b. inventories
c. cash
d. both b and c
e. all of the above
42. 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.
43. The precautionary motive for holding cash assumes that balances are held:
a. to satisfy the need for cash that arises in the ordinary course of doing business.
b. to satisfy possible but as yet indefinite needs.
c. as a precaution against missing possible profit-making opportunities.
d. for speculative purposes.
44. The primary concern in the management of cash and marketable securities for an operating company is to:
a. be profitable.
b. balance liquidity needs against investment opportunities.
c. keep enough cash on hand to buy a competitor if it becomes available.
d. both a and c.
e. all of the above.
45. Which of the following is considered to be a spontaneous source of financing?
a. Operating leases
b. Accounts receivable
c. Inventory
d. Accounts payable
46. The purpose of carrying inventory is to:
a. make different production processes more dependent on sales.
b. make sales more independent of the production process.
c. have collateral for loans.
d. improve the current ratio.
47. The net present value always provides the correct decision provided that:
a. cash flows are constant over the asset's life.
b. the required rate of return is greater than the internal rate of return.
c. capital rationing is not imposed.
d. the internal rate of return is positive.
48. When selecting the best project from a group of mutually exclusive projects you should choose the project with the highest:
a. net present value.
b. internal rate of return.
c. accounting rate of return.
d. payback.
49. The most expensive source of capital is:
a. preferred stock.
b. new common stock.
c. debt.
d. retained earnings.
50. When calculating the average cost of capital, which of the following has to be adjusted for taxes?
a. Common stock
b. Retained earnings
c. Debt
d. Preferred stock
