50 multiple choice for finance

1. Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers? A. articles of incorporation B. corporate breakdown C. agency problem D. bylaws E. legal liability 2. Which of the following questions are addressed by financial managers? I. How should a product be marketed? II. Should customers be given 30 or 45 days to pay for their credit purchases? III. Should the firm borrow more money? IV. Should the firm acquire new equipment? A. I and IV only B. II and III only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

3. Which one of the following is a capital budgeting decision? A. determining how many shares of stock to issue B. deciding whether or not to purchase a new machine for the production line C. deciding how to refinance a debt issue that is maturing D. determining how much inventory to keep on hand E. determining how much money should be kept in the checking account 4. Decisions made by financial managers should primarily focus on increasing which one of the following? A. size of the firm B. growth rate of the firm C. gross profit per unit produced D. market value per share of outstanding stock E. total sales 5. Essay List and briefly describe the three general areas of responsibility for a financial manager. The three general areas are: 1) Capital Budgeting: where the financial manager identifies prospective investments 2) Capital Structure: where the manager decides on the optimal capital structure used to finance the firms operations 3) Working Capital Management: controlling and managing the firms short-term assets and liabilities

Section II: Financial Statements, Taxes and Cash Flow 6. The book value of a firm is: A. equivalent to the firm's market value provided that the firm has some fixed assets. B. based on historical cost. C. generally greater than the market value when fixed assets are included. D. more of a financial than an accounting valuation. E. adjusted to the market value whenever the market value exceeds the stated book value. 7. Which of the following are expenses for accounting purposes but are not operating cash flows for financial purposes? I. interest expense II. taxes III. costs of goods sold IV. depreciation

A. IV only B. II and IV only C. I and III only D. I and IV only E. I, II, and IV only

8. A firm has $520 in inventory, $1,860 in fixed assets, $190 in accounts receivables, $210 in accounts payable, and $70 in cash. What is the amount of the current assets? A. $710 B. $780 C. $990 D. $2,430 E. $2,640 9. Crandall Oil has total sales of $1,349,800 and costs of $903,500. Depreciation is $42,700 and the tax rate is 34 percent. The firm does not have any interest expense. What is the operating cash flow? A. $129,152 B. $171,852 C. $179,924 D. $281,417 E. $309,076

Earnings before interest and taxes = $1,349,800 - $903,500 - $42,700 = $403,600 Tax = $403,600 .34 = $137,224 Operating cash flow = $403,600 + $42,700 - $137,224 = $309,076

10.

What is the change in the net working capital from 2010 to 2011? A. -$1,194 B. $1,306 C. $1,887 D. $4,780 E. $5,172 Change in net working capital = ($4,771 - $1,532) - ($6,127 - $4,194) = $1,306 11. Relationships determined from a firm's financial information and used for comparison purposes are known as: A. financial ratios. B. identities. C. dimensional analysis.

D. scenario analysis. E. solvency analysis.

12. According to the Statement of Cash Flows, a decrease in accounts receivable will _____ the cash flow from _____ activities. A. decrease; operating B. decrease; financing C. increase; operating D. increase; financing E. increase; investment

13. The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling price per unit also remained constant. This accomplishment will be reflected in the firm's financial ratios in which one of the following ways? A. decrease in the inventory turnover rate B. decrease in the net working capital turnover rate C. no change in the fixed asset turnover rate D. decrease in the day's sales in inventory

E. no change in the total asset turnover rate

14. Shareholders probably have the most interest in which one of the following sets of ratios? A. return on assets and profit margin B. long-term debt and times interest earned C. price-earnings and debt-equity D. market-to-book and times interest earned E. return on equity and price-earnings

15. Al's Sport Store has sales of $897,400, costs of goods sold of $628,300, inventory of $208,400, and accounts receivable of $74,100. How many days, on average, does it take the firm to sell its inventory assuming that all sales are on credit? A. 74.19 days B. 84.76 days C. 121.07 days D. 138.46 days E. 151.21 days

Inventory turnover = $628,300/$208,400 = 3.014875 Days in inventory = 365/3.014875 = 121.07 days Essay Question 16. You need to analyze a firm's performance in relation to its peers. You can do this either by comparing the firms' balance sheets and income statements or by comparing the firms' ratios. If you only had time to use one means of comparison which method would you use and why? I would use Ratio Analysis since different companies are of different sizes hence it would be hard to compare performances based on dollar values. This is in addition to the fact that ratios allow the analyst to see relationship between items on the financial statements that are difficult to see using dollar values.

Section III: Valuation of Future Cash Flows 17. The process of determining the present value of future cash flows in order to know their worth today is called which one of the following? A. compound interest valuation B. interest on interest computation C. discounted cash flow valuation D. present value interest factoring E. complex factoring

18. You invested $1,400 in an account that pays 5 percent simple interest. How much more could you have earned over a 20-year period if the interest had compounded annually? A. $749.22 B. $830.11

C. $882.19 D. $901.15 E. $914.62

Simple interest = $1,400 + ($1,400 .05 20) = $2,800 Annual compounding = $1,400 (1.05)20 = $3,714.62 Difference = $3,714.62 - $2,800 = $914.62

19. You just received $225,000 from an insurance settlement. You have decided to set this money aside and invest it for your retirement. Currently, your goal is to retire 25 years from today. How much more will you have in your account on the day you retire if you can earn an average return of 10.5 percent rather than just 8 percent? A. $417,137 B. $689,509 C. $1,050,423 D. $1,189,576 E. $1,818,342 Future value = $225,000 (1 + .105)25 = $2,730,483 Future value = $225,000 (1 + .08)25 = $1,540,907 Difference = $2,730,483 - $1,540,907 = $1,189,576 20. When you retire 40 years from now, you want to have $1.2 million. You think you can earn an average of 12 percent on your investments. To meet your goal, you are trying to

decide whether to deposit a lump sum today, or to wait and deposit a lump sum 2 years from today. How much more will you have to deposit as a lump sum if you wait for 2 years before making the deposit? A. $1,414.14 B. $2,319.47 C. $2,891.11 D. $3,280.78 E. $3,406.78 Present value = $1,200,000 [1/(1 + .12)40] = $12,896.16 Present value = $1,200,000 [1/(1 + .12)38] = $16,176.94 Difference = $16,176.94 - $12,896.16 = $3,280.78

Essay Question 21. You are considering two lottery payment options: Option A pays $10,000 today and Option B pays $20,000 at the end of ten years. Assume you can earn 6 percent on your savings. Which option will you choose if you base your decision on present values? Which option will you choose if you base your decision on future values? Explain why your answers are either the same or different. To be able to answer this question we need to discount the $20,000 to be received 10 years from now to its present value. The PV = $11,167.90 as can be seen from the attached excel sheet. I should therefore take Option B since it has a higher present value.

22. An ordinary annuity is best defined by which one of the following? A. increasing payments paid for a definitive period of time B. increasing payments paid forever C.

equal payments paid at regular intervals over a stated time period D. equal payments paid at regular intervals of time on an ongoing basis E. unequal payments that occur at set intervals for a limited period of time

23. You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. You can earn 6 percent on your money. Which option should you take and why? A. You should accept the payments because they are worth $209,414 to you today. B. You should accept the payments because they are worth $247,800 to you today. C. You should accept the payments because they are worth $336,000 to you today. D. You should accept the $200,000 because the payments are only worth $189,311 to you today. E. You should accept the $200,000 because the payments are only worth $195,413 to you today. Please see the attached excel sheet for calculations 24. You have been investing $250 a month for the last 13 years. Today, your investment account is worth $73,262. What is your average rate of return on your investments? A. 8.94 percent B. 9.23 percent C. 9.36 percent D. 9.41 percent

E. 9.78 percent Please see the attached excel sheet for calculations

25. Your parents have made you two offers. The first offer includes annual gifts of $10,000, $11,000, and $12,000 at the end of each of the next three years, respectively. The other offer is the payment of one lump sum amount today. You are trying to decide which offer to accept given the fact that your discount rate is 8 percent. What is the minimum amount that you will accept today if you are to select the lump sum offer? A. $28,216 B. $29,407 C. $29,367 D. $30,439 E. $30,691 Please see the attached excel sheet for calculations

26. You are considering a project which will provide annual cash inflows of $4,500, $5,700, and $8,000 at the end of each year for the next three years, respectively. What is the present value of these cash flows, given a 9 percent discount rate? A. $14,877 B. $15,103 C. $15,429

D. $16,388 E. $16,847 Please see the attached excel sheet for calculations

27. Grand Adventure Properties offers a 9.5 percent coupon bond with annual payments. The yield to maturity is 11.2 percent and the maturity date is 11 years from today. What is the market price of this bond if the face value is $1,000? A. $895.43 B. $896.67 C. $941.20 D. $946.18 E. $953.30

Please see the attached excel sheet for calculations 28. You are purchasing a 20-year, zero-coupon bond. The yield to maturity is 8.68 percent and the face value is $1,000. What is the current market price? A. $106.67 B. $108.18 C. $182.80 D.

$221.50 E. $228.47

29. Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings? A. dual class B. cumulative C. non-cumulative D. preferred E. common

30. What are the distributions to shareholders by a corporation called? A. retained earnings B. net income C. dividends D. capital payments E. diluted profits

31. Atlas Mines has adopted a policy of increasing the annual dividend on its common stock at a constant rate of 2.75 percent annually. The firm just paid an annual dividend of $1.67. What will the dividend be six years from now? A. $1.88 B. $1.92 C. $1.97 D. $2.02 E. $2.05 D6 = $1.67 (1.0275)6 = $1.97 Section IV: Capital Budgeting 32. A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called? A. net present value B. internal return C. payback value D. profitability index E. discounted payback

33. The length of time a firm must wait to recoup the money it has invested in a project is called the: A. internal return period. B. payback period. C. profitability period. D. discounted cash period. E. valuation period.

34. The internal rate of return is defined as the: A. maximum rate of return a firm expects to earn on a project. B. rate of return a project will generate if the project in financed solely with internal funds. C. discount rate that equates the net cash inflows of a project to zero. D. discount rate which causes the net present value of a project to equal zero. E. discount rate that causes the profitability index for a project to equal zero.

35. When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

A. accepted because the internal rate of return is positive. B. accepted because the profitability index is greater than 1. C. accepted because the profitability index is negative. D. rejected because the internal rate of return is negative. E. rejected because the net present value is negative.

36. You are considering a project with an initial cost of $7,500. What is the payback period for this project if the cash inflows are $1,100, $1,640, $3,800, and $4,500 a year over the next four years, respectively? A. 3.21 years B. 3.28 years C. 3.36 years D. 4.21 years E. 4.29 years Payback = 3.21 years

37. A firm evaluates all of its projects by using the NPV decision rule. At a required return of 14 percent, the NPV for the following project is _____ and the firm should _____ the project.

A. $5,684.22; reject B. $7,264.95; accept C. $7,264.95; reject D. $9,616.93; accept E. $9,616.93; reject

Essay Question 38. How does the net present value (NPV) decision rule relate to the primary goal of financial management, which is creating wealth for shareholders? The Net Present Value rule tells us to accept investments with positive net present value. When an investment has a positive net present value, this would mean that the investment adds value to the firms value which aligns with the goal of creating wealth for a firm's shareholders as only projects which create wealth are approved for acceptance. Section V: Cost of Capital 39. The average of a firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure is called the:

A. reward to risk ratio. B. weighted capital gains rate. C. structured cost of capital. D. subjective cost of capital. E. weighted average cost of capital.

40. The capital structure weights used in computing the weighted average cost of capital: A. are based on the book values of total debt and total equity. B. are based on the market value of the firm's debt and equity securities. C. are computed using the book value of the long-term debt and the book value of equity. D. remain constant over time unless the firm issues new securities. E. are restricted to the firm's debt and common stock.

41. Which one of the following statements is correct for a firm that uses debt in its capital structure? A. The WACC should decrease as the firm's debt-equity ratio increases. B.

When computing the WACC, the weight assigned to the preferred stock is based on the coupon rate multiplied by the par value of the preferred. C. The firm's WACC will decrease as the corporate tax rate decreases. D. The weight of the common stock used in the computation of the WACC is based on the number of shares outstanding multiplied by the book value per share. E. The WACC will remain constant unless a firm retires some of its debt.

42. Central Systems, Inc. desires a weighted average cost of capital of 8 percent. The firm has an aftertax cost of debt of 5.4 percent and a cost of equity of 15.2 percent. What debtequity ratio is needed for the firm to achieve its targeted weighted average cost of capital? A. 0.38 B. 0.44 C. 1.02 D. 2.77 E. 3.63 WACC = 0.08 = [We 0.152] + [(1 - We) 0.054)] We = 0.2653; Wd = 1 - We = 0.7347 Debt-equity ratio = 0.7347/0.2653 = 2.77 43. Carson Electronics uses 70 percent common stock and 30 percent debt to finance its operations. The aftertax cost of debt is 5.4 percent and the cost of equity is 15.4 percent. Management is considering a project that will produce a cash inflow of $36,000 in the first year. The cash inflows will then grow at 3 percent per year forever. What is the

maximum amount the firm can initially invest in this project to avoid a negative net present value for the project? A. $299,032 B. $382,979 C. $411,406 D. $434,086 E. $441,414 WACC = 0.70(0.154) + 0.30(0.054) = 0.124 PV = $36,000/(0.124 - 0.03) = $382,979 Section VI: Short Term Financial Planning 44. The length of time between the purchase of inventory and the receipt of cash from the sale of that inventory is called the: A. operating cycle. B. inventory period. C. accounts receivable period. D. accounts payable period. E. cash cycle.

45. The length of time between the day a firm purchases an item from its supplier until the day that supplier is paid for that purchase is called the:

A. operating cycle. B. inventory period. C. accounts receivable period. D. accounts payable period. E. cash cycle.

46. Which one of the following increases cash? A. granting credit to a customer B. purchasing new machinery C. making a payment on a bank loan D. purchasing inventory E. accepting credit from a supplier

47. Which of the following are uses of cash? I. collecting a receivable II. increasing inventory III. obtaining a bank loan

IV. paying a supplier for previous purchases

A. I and III only B. II and IV only C. I and II only D. I, II, and IV only E. II, III, and IV only

48. Which one of the following will increase net working capital? Assume the current ratio is greater than 1.0. A. paying a supplier for a previous purchase B. paying off a long-term debt C. selling inventory at cost D. purchasing inventory on credit E. selling inventory at a profit on credit

49. An increase in which one of the following is an indicator that an accounts receivable policy is becoming more restrictive?

A. bad debts B. accounts receivable turnover rate C. accounts receivable period D. credit sales E. operating cycle

50. Denver Interiors, Inc., has sales of $836,000 and cost of goods sold of $601,000. The firm had a beginning inventory of $36,000 and an ending inventory of $47,000. What is the length of the inventory period? A. 19.21 days B. 20.89 days C. 25.20 days D. 30.53 days E. 33.69 days Inventory turnover = $601,000/[($36,000 + $47,000)/2] = 14.481928 Inventory period = 365/14.481928 = 25.20 days