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Finance Multiple Choice Questions Test Bank




Question;1) Which of the following best describes the goal of the firm? A.The maximization of the total market value of the firm's common stock] B.Profit maximization C.Risk minimization D.None of the above2) In terms of organizational costs, which of the following sequences is correct, moving from lowest to highest cost? A.Corporation, limited partnership, general partnership, sole proprietorship B.Sole proprietorship, general partnership, limited partnership, corporation C.Sole proprietorship, general partnership, corporation, limited partnership D.General partnership, sole proprietorship, limited partnership, corporation3) The true owners of the corporation are the: A.board of directors of the firm. B.preferred stockholders. C.common stockholders. D.holders of debt issues of the firm.4) When public corporations decide to raise cash in the capital markets, what type of financing vehicle is most favored? A.Common stock B.Preferred stock C.Corporate bonds D.Retained earnings5) Money market instruments include: A.corporate bonds. B.preferred stock. C.common stock. D.bankers' acceptances.6) Which of the following does NOT involve underwriting by an investment banker? A.Syndicated purchases B.Negotiated purchases C.Commission basis purchases D.Competitive bid purchases7) According to the agency problem, _________ represent the principals of a corporation. A.employees B.managers C.suppliers D.shareholders8) Difficulty in finding profitable projects is due to: A.ethical dilemmas. B.competitive markets. C.opportunity costs. responsibility.9) Which of the following is NOT a principle of basic financial management? A.Efficient capital markets B.Risk/return tradeoff C.Incremental cash flow counts D.Profit is king10) The accounting rate of return on stockholders' investments is measured by: A.operating income return on investment. B.return on assets. C.return on equity. D.realized rate of inflation.11) Another name for the acid test ratio is the: A.inventory turnover ratio. B.current ratio. C.quick ratio. D.average collection period.12) Marshall Networks, Inc. has a total asset turnover of 2.5% and a net profit margin of 3.5%. The firm has a return on equity of 17.5%. Calculate Marshall's debt ratio. A.50% B.30% C.40% D.60%13) You have $10,000 to invest. You do not want to take any risk, so you will put the funds in a savings account at the local bank. Of the following choices, which one will produce the largest sum at the end of 22 years? A.An account that compounds interest quarterly B.An account that compounds interest annually C.An account that compounds interest daily D.An account that compounds interest monthly14) If you are an investor, which of the following would you prefer? A.Earnings on funds invested would compound monthly. B.Earnings on funds invested would compound annually. C.Earnings on funds invested would compound daily. D.Earnings on funds invested would compound quarterly.15) Northwest Bank pays a quoted annual (nominal) interest rate of 4.75%. However, it pays interest (compouned) daily using a 365-day year. What is the effective annual rate of return (APY)? A.3.61% B.4.75% C.5.02% D.4.86%16) The primary purpose of a cash budget is to: A.provide a detailed plan of future cash flows. B.determine the level of investment in current and fixed assets. C.determine accounts payable. D.determine the estimated income tax for the year.17) Which of the following is NOT a basic function of a budget? A.Budgets compare historical costs of the firm with its current cost performance. B.Budgets indicate the need for future financing. C.Budgets provide the basis for corrective action when actual figures differ from the budgeted figures. D.Budgets allow for performance evaluation.18) Which of the following statements about the percent-of-sales method of financial forecasting is true? A.It involves estimating the level of an expense, asset, or liability for a future period as a percent of the forecast for sales revenues. B.It is the least commonly used method of financial forecasting. C.It is a much more precise method of financial forecasting than a cash budget would be. D.It projects all liabilities as a fixed percentage of sales.19) The break-even model enables the manager of a firm to: A.determine the quantity of output that must be sold to cover all operating costs. B.calculate the minimum price of common stock for certain situations. C.set appropriate equilibrium thresholds. D.determine the optimal amount of debt financing to use.20) Which of the following is a non-cash expense? A.Packaging costs B.Depreciation expenses C.Interest expense D.Administrative salaries21) A plant can remain operating when sales are depressed: an effort to cover at least some of the variable cost. B.if the selling price per unit exceeds the variable cost per unit. help the local economy. D.unless variable costs are zero when production is zero.22) How long will it take $750 to double at 8% compounded annually? A.9 years B.6.5 years C.48 months D.12 years23) The present value of a single future sum: A.depends upon the number of discount periods. B.increases as the discount rate increases. generally larger than the future sum. D.increases as the number of discount periods increas.24) Which of the following is the formula for compound value? A.FVn = P/(1+i)n B.FVn = P(1+i)-n C.FVn = (1+i)/P D.FVn = P(1+i)n25) Which of the following is considered to be a spontaneous source of financing? A.Inventory B.Accounts payable C.Accounts receivable D.Operating leases26) A toy manufacturer following the hedging principle will generally finance seasonal inventory build-up prior to the Christmas season with: credit. B.preferred stock. C.selling equipment. D.common stock.27) Which of the following is NOT considered a permanent source of financing? A.Preferred stock B.Commercial paper C.Common stock D.Corporate bonds28) Compute the payback period for a project with the following cash flows, if the company's discount rate is 12%. Initial outlay = $450 Cash flows: Year 1 = $325 Year 2 = $ 65 Year 3 = $100 A.2.88 years B.2.6 years C.3.17 years D.3.43 years29) Dieyard Battery Recyclers is considering a project with the following cash flows: Initial outlay = $13,000 Cash flows: Year 1 = $5,000 Year 2 = $3,000 Year 3 = $9,000 If the appropriate discount rate is 15%, compute the NPV of this project. A.$27,534 B.$8,891 C.-$466 D.$4,00030) We compute the profitability index of a capital-budgeting proposal by: A.dividing the present value of the annual after-tax cash flows by the cost of the project. B.dividing the present value of the annual after-tax cash flows by the cost of capital. C.multiplying the IRR by the cost of capital. D.multiplying the cash inflow by the IRR.31) Which of the following is considered to be a deficiency of the IRR? A.It fails to utilize the time value of money. B.It could produce more than one rate of return. C.It fails to properly rank capital projects. D.It is not useful in accounting for risk in capital budgeting.32) Many firms today continue to use the payback method but employ the NPV or IRR methods as secondary decision methods of control for risk. A.True B.False33) Most firms use the payback period as a secondary capital-budgeting technique, which, in a sense, allows them to control for risk. A.True B.False34) ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five years. Calculate the NPV of the assembler if the required rate of return is 12%. (Round your answer to the nearest $1.) A.$7,621 B.$4,568 C.$1,056 D.$6,57735) The NPV assumes cash flows are reinvested at the: A.real rate of return. B.NPV. C.IRR. D.cost of capital.36) The firm should accept independent projects if: A.the IRR is positive. B.the profitability index is greater than 1.0. C.the payback is less than the IRR. D.the NPV is greater than the discounted payback.37) The average cost associated with each additional dollar of financing for investment projects is: A.risk-free rate. B.the marginal cost of capital. C.the incremental return. D.beta.38) The marginal cost of preferred stock is equal to: A.(1 - tax rate) times the preferred stock dividend divided by net price. B.the preferred stock dividend divided by its par value. C.the preferred stock dividend divided by market price. D.the preferred stock dividend divided by the net market price.39) The most expensive source of capital is: A.debt. B.preferred stock. common stock. D.retained earnings.40) The XYZ Company is planning a $50 million expansion. The expansion is to be financed by selling $20 million in new debt and $30 million in new common stock. The before-tax required rate of return on debt is 9%, and the required rate of return on equity is 14%. If the company is in the 40% tax bracket, what is the marginal cost of capital? A.10.6% B.14.0% C.9.0% D.11.5%41) Shawhan Supply plans to maintain its optimal capital structure of 30% debt, 20% preferred stock, and 50% common stock far into the future. The required return on each component is: debt?10%, preferred stock?11%, and common stock?18%. Assuming a 40% marginal tax rate, what after-tax rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged? A.10.0% B.18.0% C.13.0% D.14.2%42) Given the following information, determine the risk-free rate. Cost of equity = 12% Beta = 1.50 Market risk premium = 3% A.7.0% B.8.0% C.7.5% D.6.5%43) Lever Brothers has a debt ratio (debt to assets) of 20%. Management is wondering if its current capital structure is too conservative. Lever Brothers's present EBIT is $3 million, and profits available to common shareholders are $1,680,000, with 457,143 shares of common stock outstanding. If the firm were to instead have a debt ratio of 40%, additional interest expense would cause profits available to stockholders to decline to $1,560,000, but only 342,857 common shares would be outstanding. What is the difference in EPS at a debt ratio of 40% versus 20%? A.$1.16 B.$2.12 C.$1.95 D.$0.8844) Lever Brothers has a debt ratio (debt to assets) of 40%. Management is wondering if its current capital structure is too conservative. Lever Brothers's present EBIT is $3 million, and profits available to common shareholders are $1,560,000, with 342,857 shares of common stock outstanding. If the firm were to instead have a debt ratio of 60%, additional interest expense would cause profits available to stockholders to decline to $1,440,000, but only 228,571 common shares would be outstanding. What is the difference in EPS at a debt ratio of 60% versus 40%? A.$3.25 B.$1.75 C.$2.00 D.$4.5045) Zybeck Corp. projects operating income of $4 million next year. The firm's income tax rate is 40%. Zybeck presently has 750,000 shares of common stock which have a market value of $10 per share, no preferred stock, and no debt. The firm is considering two alternatives to finance a new product: (a) the issuance of $6 million of 10% bonds, or (b) the issuance of 60,000 new shares of common stock. If Zybeck issues common stock this year, what will projected EPS be next year? A.$2.33 B.$2.10 C.$2.96 D.$1.6746) Which of the following statements about exchange rates is true? A.Exchange rates were fixed prior to establishing a floating-rate international currency system, and all countries set a specific parity rate for their currency relative either to the Canadian or to the U.S. dollar. B.Day-to-day fluctuations in exchange rates currently are caused by changes in parity rates. C.A floating-rate international currency system has been operating since 1973. D.All of the choices.47) A bond sold simultaneously in several different foreign capital markets, but denominated in a currency different from the country in which the bond is issued, is called a(n): A.floating bond. bond. C.Eurobond. capital bond.48) _________ risk is generally considered only a paper gain or loss. A.Economic B.Transaction C.Financial D.Translation49) The interplay between interest rate differentials and exchange rates such that both adjust until the foreign exchange market and the money market reach equilibrium is called the: A.interest rate parity theory. B.purchasing power parity theory. C.arbitrage markets theory. D.balance of payments quantum theory.50) A spot transaction occurs when one currency is: A.exchanged for another currency at a specified price. B.deposited in a foreign bank. C.traded for another at an agreed-upon future price. D.immediately exchanged for another currency.51) If the quote for a forward exchange contract is greater than the computed price, the forward contract is: A.a good buy. B.overvalued. equilibrium. D.undervalued.52) An important (additional) consideration for a direct foreign investment is: A.political risk. B.maximizing the firm's profits. C.attaining a high international P/E ratio. D.all of the above.53) One reason for international investment is to reduce: A.advantages in a foreign country. B.portfolio risk. C.beta risk. D.price-earnings (P/E) ratios.54) Buying and selling in more than one market to make a riskless profit is called: trading. B.profit maximization. C.cannot be determined from the above information. D.arbitrage.


Paper#49372 | Written in 18-Jul-2015

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