1) Regarding risk levels, financial managers should
A. focus primarily on market fluctuations
B. evaluate investor's desire for risk
C. pursue higher risk projects because they increase value
D. avoid higher risk projects because they destroy value
2) One of the major disadvantages of a sole proprietorship is
A. low organizational costs.
B. low operating costs.
C. that there is unlimited liability to the owner.
D. the simplicity of decision making.
3) Corporate governance is the
A. operation of a company by the chief executive officer (CEO) and other senior executives on the management team.
B. governance of the company by the board of directors with a focus on social responsibility.
C. relationship and exercise of oversight by the board of directors of the company.
D. relationship between the chief financial officer and institutional investors.
4) Which account represents the cumulative earnings of the firm since its formation, minus dividends paid?
A. Retained earnings
B. Accumulated depreciation
C. Paid-in capital
D. Common stock
5) Which of the following is not a primary source of capital to the firm?
A. preferred stock
B. bonds
C. assets
D. common stock
6) An increase in investments in long-term securities will:
A. increase cash flow from investing activities.
B. decrease cash flow from financing activities.
C. decrease cash flow from investing activities.
D. increase cash flow from financing activities.
7) Which of the following is not considered to be a profitability ratio?
A. profit margin
B. return on assets (investment)
C. times interest earned
D. return on equity
8) For a given level of profitability as measured by profit margin, the firm's return on equity will
A. increase as its debt-to-assets ratio decreases.
B. decrease as its times-interest-earned ratio decreases.
C. decrease as its current ratio increases.
D. increase as its debt-to assets ratio increases.
9) In examining the liquidity ratios, the primary emphasis is the firm's
A. ability to effectively employ its resources.
B. ability to earn an adequate return.
C. overall debt position.
D. ability to pay short-term obligations on time.
13) In the percent-of-sales method, an increase in dividends
A. has no effect on required new funds.
B. more information is needed.
C. will decrease required new funds.
D. will increase required new funds.
14) In financial statements, the number of units shown in cost of goods sold as compared to the number of the units actually produced
A. is the same.
B. can be either higher or lower.
C. is lower.
D. is higher.
15) The percent-of-sales method of financial forecasting
A. assumes that balance sheet accounts maintain a constant relationship to sales.
B. provides a month-to-month breakdown of data.
C. requires more time than a cash budget approach.
D. is more detailed than a cash budget approach.
16) The difference between total receipts and total payments is referred to as
A. net cash flow.
B. cash balance.
C. beginning cash flow.
D. cumulative cash flow.
17) 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. 2,1,3,4
B. 3,2,1,4
C. 3,2,4,1
D. 1,2,3,4
18) The pro forma income statement is important to the overall process of constructing pro forma statements because it allows us to determine a value for:
A. interest expense.
B. prepaid expenses.
C. gross profit.
D. change in retained earnings.
19) Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?
A. Stable industry
B. Low interest cost compared to return on assets
C. Cyclical demand for the firm's products.
D. Upswing of business cycle.
20) Financial leverage deals with:
A. the relationship of fixed and variable costs.
B. the entire balance sheet.
C. the relationship of debt and equity in the capital structure.
D. the entire income statement.
21) The degree of operating leverage is computed as
A. percent change in operating profit divided by percent change in net income.
B. percent change in operating income divided by percent change in volume.
C. percent change in volume divided by percent change in operating profit.
D. percent change in EPS divided by percent change in operating income.
22) If a firm has a price of $4.00, variable cost per unit of $2.50 and a breakeven point of 20,000 units, fixed costs are equal to:
A. $13,333
B. $50,000
C. $10,000
D. $30,000
23) The break-even point can be calculated as
A. variable costs divided by contribution margin.
B. fixed cost divided by contribution margin.
C. total costs divided by contribution margin.
D. variable cost times contribution margin.
24) In break-even analysis, the contribution margin is defined as
A. price minus fixed cost.
B. variable cost minus fixed cost.
C. fixed cost minus variable cost.
D. price minus variable cost.
25) Kuznets Rental Center requires $1,000,000 in financing over the next two years. Kuznets can borrow long-term at 9 percent interest per year for two years. Alternatively, Kuznets can borrow short-term and pay 7 percent interest in the first year. Then, Kuznets projects paying 10 percent interest in the second year. Assuming Kuznets pays off the accrued interest at the end of each year, which of the following statements is true?
A. Kuznets will definitely end up paying less under the long-term financing plan.
B. Kuznets will probably pay more under the short-term financing plan.
C. Kuznets will probably pay less under the short-term financing plan.
D. Kuznets will definitely end up paying more under the long-term financing plan.
26) The theory of the term structure of interest rates which suggests 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. segmentation theory.
B. liquidity premium theory.
C. market average rate theory.
D. expectations hypothesis.
27) When the yield curve is upward sloping, generally a financial manager should:
A. utilize short-term financing
B. wait for future financing
C. lease
D. utilize long-term financing
28) An aggressive, risk-oriented firm will likely
A. borrow short-term and carry low levels of liquidity.
B. borrow long-term and carry high levels of liquidity.
C. borrow short-term and carry high levels of liquidity.
D. borrow long-term and carry low levels of liquidity.
29) Which of the following combinations of asset structures and financing patterns is likely to create the most volatile earnings?
A. Liquid assets and heavy short-term borrowing
B. Illiquid assets and heavy long-term borrowing
C. Illiquid assets and heavy short-term borrowing
D. Liquid assets and heavy long-term borrowing
30) Risk exposure due to heavy short-term borrowing can be compensated for by
A. carrying more receivables to increase cash flow.
B. carrying illiquid assets.
C. carrying highly liquid assets.
D. carrying longer term, more profitable current assets.
31) In managing cash and marketable securities, what should be the manager's primary concern?
A. Liquidity and safety
B. Maximization of liquid assets
C. Maximization of profit
D. Acceptable return on investment
32) "Float" takes place because
A. a customer writes "hot" checks.
B. the level of cash on the firm's books is equal to the level of cash in the bank.
C. a firm is early in paying its bills.
D. a lag exists between writing a check and clearing it through the banking system.
33) Which of the following is not a valid reason for holding cash?
A. to provide a compensating balance for a bank
B. to earn the highest return possible
C. to meet transaction requirements
D. to satisfy emergency needs for funds
34) Dun & Bradstreet is known for providing
A. consumer credit reports to credit card companies.
B. credit scoring reports that rank a company's payment habits relative to its peer group.
C. interest rate information to cash managers.
D. cash management systems to corporate treasurers.
35) Variables important to credit scoring models include
A. negative public records.
B. facility ownership.
C. all of these variables apply.
D. age of company in years.
36) The most subjective and also significant segment of the 5 C's of credit for giving final approval is
A. collateral.
B. character.
C. conditions.
D. capacity.
37) Compensating balances
A. are created by having a sweep account.
B. generate returns to customers from interest bearing accounts.
C. are used to reward new accounts.
D. are used by banks as a substitute for charging service fees.
38) Which of the following is not a true statement about commercial paper?
A. Finance paper is also referred to as direct paper.
B. Dealer paper is sold directly to the lender by a finance company.
C. Industrial companies, utility firms or finance companies too small to sell direct paper sell dealer paper.
D. Finance paper is sold directly to the lender by the finance company.
39) Commercial paper that is sold without going through a broker or dealer is known as
A. dealer paper.
B. book-entry transactions.
C. term paper.
D. direct paper.
40) From the banker's point of view, short-term bank credit is an excellent way of financing
A. permanent working capital needs.
B. repayment of long-term debt.
C. seasonal bulges in inventory and receivables.
D. fixed assets.
41) Which method of controlling pledged inventory provides the greatest degree of security to the lender?
A. Overall inventory liens
B. Trust receipts
C. Warehousing
D. Blanket inventory liens
42) Trade credit may be used to finance a major part of the firm's working capital when
A. neither the firm nor the supplier extends credit.
B. the firm extends more liberal credit terms than the supplier.
C. the firm extends less liberal credit terms than the supplier.
D. the firm and the supplier both extend the same credit terms.
43) An annuity may be defined as
A. a series of consecutive payments of equal amounts.
B. a series of payments of unequal amount.
C. a payment at a fixed interest rate.
D. a series of yearly payments.
44) As the interest rate increases, the present value of an amount to be received at the end of a fixed period
A. Not enough information to tell
B. decreases
C. increases
D. remains the same
45) In determining the future value of a single amount, one measures
A. the present value of periodic payments at a given interest rate.
B. the present value of an amount discounted at a given interest rate.
C. the future value of periodic payments at a given interest rate.
D. the future value of an amount allowed to grow at a given interest rate.
46) Mr. Blochirt is creating a college investment fund for his daughter. He will put in $850 per year for the next 15 years and expects to earn an 8% annual rate of return. How much money will his daughter have when she starts college?
A. $23,079
B. $12,263
C. $11,250
D. $24,003
47) 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. Future value of $1
C. Present value of $1
D. Present value of an annuity of $1
48) The future value of a $1000 investment today at 8 percent annual interest compounded semiannually for 5 years is
A. $1,480
B. $1,520
C. $1,469
D. $1,555
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