Multiple Choice Answers

1. Which of the following measures an organization’s liquidity?
a. acid test ratio
b. debt ratio
c.. return on equity
d. times interest earned
e. return on assets

2. Which of the following is a method by which securities are distributed to final investors?

a. negotiated purpose
b. commission or best effort basis
c. direct sale
d. competitive bid purchase
e. all of the above

3. What is a cash budget?
a. detailed plan of future cash flows
b. a budget that shows only what cash comes in
c. a historical look at cash flows
d. a report that analyzes the cash account
e. a report that analyzes accounts receivable

4. If your revenue is $10 million, your variable cost is $6 million, and your fixed cost is $3 million, what is your contribution margin?
a. $4 million
b. $1 million
c. $3 million
d. $9 million
e. $7 million

5. A project has an initial outflow of $10,000. The project will generate free cash flows of $8,000 per year for two years. The discount rate is 8%. What is this project’s net present value (NPV)?
a. $4,250
b. $6,000
c. $4,264
d. $16,000
e. $8,000

6. The 3 primary motives for holding cash are:

a. transactions, speculative, predictive
b. speculative, precautionary, predictive
c. transactions, speculative, storing
d. predictive, storing, speculative
e. transactions, precautionary, speculative

7. What happens to the cost of debt for firms with debt as their corporate tax rates increase?
a. cost of debt increases
b. cost of debt decreases
c. cost of debt remains the same
d. cost of debt can either increase or decrease, depending on the amount of debt
e. cost of debt can either increase or decrease, depending on the percent debt represents of the entire capital structure

8. What is the weighted average cost of capital (WACC) for a firm where debt is 40% of the firm, preferred stock is 10% of the firm, common stock is 50% of the firm, after tax cost of debt is 8%, cost of preferred stock is 12%, and cost of common stock is 18%?
a. 12.00%
b. 12.38%
c. 12.67%
d. 13.40%
e. 16.33%

9. Which of the following is a risk in direct foreign investment?
a. business risk
b. financial risk
c. political risk
d. exchange rate risk
e. all of the above

10. If a Euro is currently equal to 1.1574 US dollars, how many dollars must a US company pay to a European company for an item that costs 1000 Euros?
a. $1,000
b. $864
c. $1,157.40
d. $115.74
e. Cannot be determined with the information given