1) Maximization of shareholder wealth is a concept in which
A. profits are maximized on a quarterly basis.
B. virtually all earnings are paid as dividends to common stockholders.
C. increased earnings is of primary importance.
D. optimally increasing the long-term value of the firm is emphasized.
2) What is the primary goal of financial management?
A. Maximizing cash flow
B. Maximizing shareholder wealth
C. Increased earnings
D. Minimizing risk of the firm
3) One of the major disadvantages of a sole proprietorship is
A. the simplicity of decision making.
B. low organizational costs.
C. that there is unlimited liability to the owner.
D. low operating costs.
4) The statement of cash flows does NOT include which of the following sections?
A. cash flows from sales activities
B. cash flows from investing activities
C. cash flows from operating activities
D. cash flows from financing activities
5) Which of the following is not a primary source of capital to the firm?
A. common stock
B. preferred stock
6) Which account represents the cumulative earnings of the firm since its formation, minus dividends paid?
A. Common stock
B. Accumulated depreciation
C. Paid-in capital
D. Retained earnings
7) The most rigorous test of a firm’s ability to pay its short-term obligations is its
A. quick ratio.
B. times-interest-earned ratio.
C. current ratio.
D. debt-to-assets ratio.
8) In examining the liquidity ratios, the primary emphasis is the firm’s
A. overall debt position.
B. ability to earn an adequate return.
C. ability to effectively employ its resources.
D. ability to pay short-term obligations on time.
9) Which of the following is not considered to be a profitability ratio?
A. times interest earned
B. return on assets (investment)
C. profit margin
D. return on equity
Refer to the figure above. The firm’s inventory turnover ratio is
Refer to the figure above. Megaframe’s current ratio is
Refer to the figure above. The firm’s debt to asset ratio is
13) In general, the larger the portion of a firm’s sales that are on credit, the
A. higher will be the firm’s need to borrow.
B. more the firm can buy raw materials on credit.
C. lower will be the firm’s need to borrow.
D. more rapidly credit sales will be paid off.
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 lower.
B. can be either higher or lower.
C. is higher.
D. is the same.
15) In order to estimate production requirements, we
A. add projected sales in units to desired ending inventory and subtract beginning inventory.
B. add beginning inventory to desired ending inventory and subtract projected sales in units.
C. add beginning inventory to projected sales in units and subtract desired ending inventory.
D. add beginning inventory to desired ending inventory and divide by two.
16) The key initial element in developing pro forma statements is
A. an income statement.
B. a sales forecast.
C. a cash budget.
D. a collections schedule.
17) A firm has beginning inventory of 300 units at a cost of $11 each. Production during the period was 650 units at $12 each. If sales were 700 units, what is the cost of goods sold (assume FIFO)?
18) The difference between total receipts and total payments is referred to as
A. beginning cash flow.
B. net cash flow.
C. cumulative cash flow.
D. cash balance.
19) The concept of operating leverage involves the use of __________ to magnify returns at high levels of operation.
A. variable costs
B. marginal costs
C. fixed costs
D. semi-variable costs
20) Financial leverage deals with:
A. the relationship of debt and equity in the capital structure.
B. the entire income statement.
C. the relationship of fixed and variable costs.
D. the entire balance sheet.
21) When a firm employs no debt
A. it has a financial leverage of zero.
B. its operating leverage is equal to its financial leverage.
C. it has a financial leverage of one.
D. it will not be profitable.
22) A firm’s break-even point will rise if
A. contribution margins increase
B. price per unit rises
C. fixed costs decrease
D. variable cost per unit rises
23) 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:
24) In break-even analysis, the contribution margin is defined as
A. price minus fixed cost.
B. variable cost minus fixed cost.
C. price minus variable cost.
D. fixed cost 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 definitely end up paying more under the long-term financing plan.
D. Kuznets will probably pay less under the short-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. expectations hypothesis.
D. market average rate theory.
27) Normally, permanent current assets should be financed by
A. short-term funds.
B. long-term funds.
C. borrowed funds.
D. internally generated funds.
28) Risk exposure due to heavy short-term borrowing can be compensated for by
A. carrying illiquid assets.
B. carrying highly liquid assets.
C. carrying longer term, more profitable current assets.
D. carrying more receivables to increase cash flow.
29) An aggressive working capital policy would have which of following characteristics?
A. A low ratio of short-term debt to fixed assets.
B. A high ratio of long-term debt to fixed assets.
C. A high ratio of short-term debt to long-term sources of funds.
D. A short average collection period.
30) Which of the following combinations of asset structures and financing patterns is likely to create the most volatile earnings?
A. Illiquid assets and heavy long-term borrowing
B. Illiquid assets and heavy short-term borrowing
C. Liquid assets and heavy long-term borrowing
D. Liquid assets and heavy short-term borrowing
31) “Float” takes place because
A. the level of cash on the firm’s books is equal to the level of cash in the bank.
B. a firm is early in paying its bills.
C. a lag exists between writing a check and clearing it through the banking system.
D. a customer writes “hot” checks.
32) In managing cash and marketable securities, what should be the manager’s primary concern?
A. Maximization of liquid assets
B. Maximization of profit
C. Acceptable return on investment
D. Liquidity and safety
33) How would electronic funds transfer affect the use of “float”?
A. Decrease its use somewhat
B. Increase its use somewhat
C. Virtually eliminate its use
D. Have no effect on its use
34) Dun & Bradstreet is known for providing
A. credit scoring reports that rank a company’s payment habits relative to its peer group.
B. interest rate information to cash managers.
C. cash management systems to corporate treasurers.
D. consumer credit reports to credit card companies.
35) The three primary policy variables to consider when extending credit include all of the following except
A. the level of inflation.
B. credit standards.
C. the terms of trade.
D. collection policy.
36) Variables important to credit scoring models include
A. negative public records.
B. age of company in years.
C. facility ownership.
D. all of these variables apply.
37) What is generally the largest source of short-term credit small firms?
A. Commercial paper
B. Bank loans
C. Installment loans
D. Trade credit
38) Commercial paper that is sold without going through a broker or dealer is known as
A. dealer paper.
B. term paper.
C. book-entry transactions.
D. direct paper.
39) Which of the following is not a true statement about commercial paper?
A. Finance paper is also referred to as direct paper.
B. Industrial companies, utility firms or finance companies too small to sell direct paper sell dealer paper.
C. Dealer paper is sold directly to the lender by a finance company.
D. Finance paper is sold directly to the lender by the finance company.
40) A large manufacturing firm has been selling on a 3/10, net 30 basis. The firm changes its credit terms to 2/20, net 90. What change might be expected on the balance sheets of its customers?
A. Increased receivables and increased bank loans
B. Increased payables and increased bank loans
C. Increased payables and decreased bank loans
D. Decreased receivables and increased bank loans
41) Which method of controlling pledged inventory provides the greatest degree of security to the lender?
A. Overall inventory liens
C. Trust receipts
D. Blanket inventory liens
42) Firms exposed to the risk of interest rate changes may reduce that risk by
A. hedging in the financial futures market.
B. pledging or factoring accounts receivable.
C. hedging in the commodities market.
D. obtaining a Eurodollar loan.
43) As the interest rate increases, the present value of an amount to be received at the end of a fixed period
B. Not enough information to tell
C. remains the same
44) In determining the future value of a single amount, one measures
A. the present value of an amount discounted at a given interest rate.
B. the present value of periodic payments at a given interest rate.
C. the future value of an amount allowed to grow at a given interest rate.
D. the future value of periodic payments at a given interest rate.
45) An annuity may be defined as
A. a series of payments of unequal amount.
B. a series of consecutive payments of equal amounts.
C. a series of yearly payments.
D. a payment at a fixed 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?
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 $1
B. Future value of an annuity of $1
C. Present value of an annuity of $1
D. Present value of $1
48) If you invest $8,000 at 12% interest, how much will you have in 7 years?