Finance Quiz 4

The purpose of a forecast cash flow statement includes all of the following except: a. b. c. It reports the historical cash flow patterns to investors d. e.

c

Which of the following parties would not normally be considered to be a claimant on a company's earnings? Select one: a. Lenders. b. Employees. c. Customers. d. Managers. e. Owners.

c

The TRANSACTION motives induces firms to hold at least some cash balances for the purpose of: a. taking advantages of unexpected investment opportunities as they arise b. meeting unforseen operating cost c. paying predictable operating cash need as they fall due d. meeting unforseen financing expenses

C

Ben's Bulk Barns is a wholesale wholefoods merchant and is investigating several mechanisms to reduce its cash conversion cycle. The first is a new inventory control and ordering system which will reduce average age of inventory from 85 days down to 55 days. The second policy change it is considering is introducing a discount for its credit customers who pay their account in full earlier. This is likely to reduce the average collection period from 52 days down to 25 days. If both changes are implemented, what will Ben's Bulk Barns cash conversion cycle be if its average payment period remains at 31.2 days?

48.9

Owners can encourage managers to act consistently with shareholder wealth maximisation by: Select one: a. rewarding managers on the basis of short-term profitability. b. incurring agency costs. c. reducing managers' personal wealth. d. minimising managers' benefits and perks. e. rewarding managers for taking more risk.

b

Anzac Corporation issued preference shares 8 years ago at a par value of $10.00 per share. If preference shares are paying $1.12 in dividends per year and the current market price is $9.02, what is the required return for Anzac's preference shares? (The allowed rounding error for this question is within 0.1%. Please type your answer in decimals. For example 9.8% should be shown as 0.098)

0.124

Anzac Corporation issued preference shares 8 years ago at a par value of $10.00 per share. If preference shares are paying $1.13 in dividends per year and the current market price is $6.27, what is the required return for Anzac's preference shares? (The allowed rounding error for this question is within 0.1%. Please type your answer in decimals. For example 9.8% should be shown as 0.098)

0.180

Question text ABDC Corporation has a target capital structure of 30% long-term debt and 70% common stock equity. The firm's before-tax cost of debt is 6.45% and its cost of equity is 12.85%. Assume that ABDC is in the 33% income tax bracket, what is ABDC's weighted average cost of capital? (Please round you answer to the nearest 0.1%, e.g. 10.1% should be shown as 0.101).

The correct answer is: 0.103

An issue of bonds in London, denominated in New Zealand dollars, by a New Zealand company is an example of a: Select one: a. eurobond. b. foreign bond. c. eurodollar deposit. d. eurocurrency loan. e. euroequity issue.

a

BigPlans Limited has taken out a mortgage on its facilities at a cost of 15%. The firm's debt ratio is 50% and the cost of equity is 20%. If the corporate tax rate is 30 percent, then the after-tax cost of debt is: Select one: a. 10.50%. b. 10.71%. c. 11.54%. d. 14.00%. e. 25.00%.

a

Ben's Bulk Barns is a wholesale wholefoods merchant and is investigating several mechanisms to reduce its cash conversion cycle. The first is a new inventory control and ordering system which will reduce average age of inventory from 85 days down to 47 days. The second policy change it is considering is introducing a discount for its credit customers who pay their account in full earlier. This is likely to reduce the average collection period from 52 days down to 22 days. If both changes are implemented, what will Ben's Bulk Barns cash conversion cycle be if its average payment period remains at 31.6 days?

37

Ben's Bulk Barns is a wholesale wholefoods merchant and is investigating several mechanisms to reduce its cash conversion cycle. The first is a new inventory control and ordering system which will reduce average age of inventory from 85 days down to 41 days. The second policy change it is considering is introducing a discount for its credit customers who pay their account in full earlier. This is likely to reduce the average collection period from 52 days down to 29 days. If both changes are implemented, what will Ben's Bulk Barns cash conversion cycle be if its average payment period remains at 31.7 days?

38.3 or 38

Two companies offer similar five-year bonds, but Company A pays 8% annual interest while Company B pays 6%. What would you conclude about the relative risks of each company? What would you conclude about the risk attitudes of the investors in each company?

Company A is risker, investors in A are less risk averse

Anzac Corporation issued preference shares 8 years ago at a par value of $10.00 per share. If preference shares are paying $1 in dividends per year and the current market price is $14.19, what is the required return for Anzac's preference shares? (The allowed rounding error for this question is within 0.1%. Please type your answer in decimals. For example 9.8% should be shown as 0.098)

The correct answer is: 0.070

The inventory management technique that seeks to determine the optimal order quantity that minimises total holding and ordering costs is: Select one: a. the ABC system. b. the EOQ model. c. the just-in-time system. d. the accounting system.

b

The major sources of funds available during the growth stage of the business life cycle are: Select one: a. personal investment from owner, friends and relatives, venture capital, banks and finance companies and suppliers. b. personal investment from owner, friends and relatives, venture capital, banks and finance companies, suppliers, retained earnings and private placements. c. banks and finance companies, suppliers, retained earnings, private placements, public offerings and offshore securities. d. personal investment from owner, friends and relatives, banks and finance companies, suppliers, retained earnings and offshore securities. e. venture capital, banks and finance companies, private placements and public offerings.

b

The type of correlation sought in the process of diversification is: a. positive correlation because the returns should move in the same direction b. zero correlation because the level of risk would be maximised c. negative correlation because the variability of the returns would be reduced to a minimum. d. inverse correlation because it reflects the overall changes in the returns e. none of them

b

During the start-up and early growth stages of a firm's life cycle, banks and financial institutions are least likely to provide the firm with: Select one: a. a short-term secured loan. b. a bank overdraft. c. an unsecured loan. d. an operating lease. e. a hire-purchase loan.

c

The financial manager of Whakapapa Limited is assessing two investment proposals, L and P. Proposal L is expected to earn a return of 14%, while Proposal P is expected to earn a return of 16%. If the manager accepts Proposal L and rejects Proposal P, then the risk-return trade-off would imply that: Select one: a. the manager is irrational. b. the manager prefers high-risk projects. c. Proposal L is riskier than Proposal P. d. Proposal P is riskier than Proposal L. e. A, B and C.

d

Which of the following statements concerning the New Zealand dividend imputation tax system is true? Select one: a. It results in equity earnings being taxed twice: once when profits are earned and again when dividends are paid to shareholders. b. It leads to a strong bias in favour of debt finance. c. Shareholders do not report dividends received as income on their personal tax returns. d. It reduces the relative tax advantage of financing with debt compared with equity sources.

d

Financial management is important to business firms because: Select one: a. it assists the firm to achieve its goals and objectives. b. it allows the firm to undertake risky investments. c. it correctly focuses management on profit maximisation. d. it quantifies shareholders' preferences for later returns over earlier returns. e. None of the above

a

Solvency refers to: Select one: a. the ability of a person or organisation to meet their financial commitments as they come due. b. the ability of a business to exit from an existing contract. c. a legal requirement for managers to behave in an ethical manner. d. the payment of dividends by a company to its shareholders.

a

The bundle of rights include: a. the right to occupy, exclude others, or to sell b. the right to borrow against c. the right to convey by inheritance d. None of the above e. All of a, b, and c are correct.

a

The start-up of the business life cycle tends to be characterised by: a. high investment and operating costs b. Highly positive net operating cash flows c. declining sales d. declining net operating cash flows e. high profits

a or d

A business plan: a. is required by those who provide funds to the firm b. contains SWALK analysis of the industry, business market and labour force c. once it has been developed and the necessary capital for the firm has been raised, if of no further use. d. All of the above e. A and C only

a?

Which of the following is the least likely to ease liquidity pressures in a fast-growing company? a. Slow down the collection of accounts receivable b. Obtain new financing c. slow down the growth rate in sales d. Reduce inventory levels e. limit product lines sold.

a? or d

In a company, it is the responsibility of _______________ to elect ______________ whose roles is to set the strategic objectives and rules for governing company. a. managers, auditiors b. the shareholders, the Board of Directors c. The board of director, managers d. the owners. managers e. management, board of directors

b

Nominal interest rates are comprised of ________________ plus a risk premium based on ___________________________. If inflation expectations increase then nominal rates would be expected to _________________. a. the risk free rate, investors characteristics, decrease b. real interest rate, investors characteristics, increase

b

What does LIM stand for? a. Land indemnity memorandum b. Land information memorandum c. Lots of important material d. Lease information memorandum e. Licence in maturity

b

What is the main philosophical reason for buying a business? a. To provide employment b. To create value for the owners c. To generate revenues d. To pay creditors

b

When establishing the financial forecast for a new business it is important that: a. there is always sufficient cash on hand to pay the business's financial obligations. b. there is an additional source of short- and long-term funds available when required. c. the forecast financial statements show only positive net profits d. initial funds raised by issuing shares or raising debt are sufficient to meet all financing requirements

b

Which of the following external events is least likely to have an impact on the financial decisions of a publicly-listed company? Select one: a. The government increases corporate income taxes. b. Two small insurance companies merge. c. The New Zealand and Sydney stock exchanges merge. d. New Zealand and Australia announce a common currency. e. The Reserve Bank tightens monetary conditions.

b

Wimpy Widgets Limited plans to issue bonds at a cost of 12%. If the firm pays tax at a rate of 30 percent of profits, the after-tax cost of debt is: Select one: a. 3.60%. b. 8.40%. c. 9.23%. d. 17.14%. e. 40.00%.

b

Which of the following is a feature of debt financing? a. Lenders directly select management b. Lenders have a priority claim on earnings and assets c. Lenders capital has no maturity date d. Interest payments are optional

b?

A private placement is: Select one: a. an issue of securities by a private company to the public. b. capital raised overseas. c. the sale of shares or debt only to selected investors. d. an informal arrangement with a bank to allow a firm to borrow up to a maximum specified amount over a set period of time. e. a pagan ritual.

c

A private placement is: a. an issue of securities by a private company to the public b. capital raised overseas c. the sale of shares or debt only to selected investors d. an informal arrangement with a bank to allow a firm to borrow up to a maximum specified amount over a set period of time. e. a pagan ritual

c

A successful budget allows you to achieve all of the following results except? a. Living within your means b. Spending your money wisely c. Buying everything you want immediately d. Reaching your financial goals e. Preparing for financial emergencies

c

Calculate the implicit interest cost of foregoing the cash discount from a supplier who offers credit terms as follows: net 45 days from invoice date; 2% cash discount if paid within 10 days. Select one: a. 16.6%. b. 20.9%. c. 21.3%. d. 24.5%. e. 40.8%.

c

Inventory Management techniques include all of the following except: a. the EOQ model b. the just-in time system c. the equivalent annuity techniques d. a computerised inventory control system

c

Which of the following statements is false concerning the cost of capital to a firm? Select one: a. It incorporates the cost of raising and using finance. b. It represents the rate of return required by the firm's investors. c. It is a short-term concept, suitable for evaluating short-term profit performance. d. It is the return that a firm must earn in order to maintain the firm's value. e. It is incorporated into the required returns set by management to evaluate proposed investments.

c

______________ assets are acquired in order to earn a return rather than provide a service. a. Tangible b. Real c. Investment d. Physical e. Personal

c

Which of the following is true? a. The bundle of rights is indivisible b. Property ownership rights are absolute c. Restrictive covenants are examples of government controls placed on the real estate d. Zoning is an example of a government restriction

c or d

In finance risk is measured by the: a. correlation of returns b. Security's expected return c. Variance and standard deviation d. Diversification of returns e. All of the above

c or e

All of the following are included in a forecast cash flow statement except: Select one: a. cash sales. b. capital contributions from owners. c. GST received from sales. d. depreciation expense. e. loan repayments.

d

Financial forecasting and planning includes: Select one: a. preparing cash flow forecasts. b. preparing forecast financial statements. c. analysis of historical investments. d. A and B. e. A, B and C.

d

Profit maximisation is deficient as a goal of financial management because it: a fails to account for the time value money b. it does not represent cash flows c. it ignore risk d. all of the above e. None of the above

d

Question text Marketable securities can best be defined as: Select one: a. financial claims that can be purchased but not sold via the financial markets. b. securities suitable for long-term investment purposes. c. contributed capital supplied by equity investors. d. short-term interest earning financial claims that can be quickly converted to cash without any significant loss of value. e. grocery store discount coupons.

d

The Euromarkets allow large, reputable companies to: a. fund substantial requirements for equity and debt b. reduce costs of financing c. legally pay no tax on their investment income d. A and B only e. All A, B and C

d

The three motives for firms to hold at least some cash balances are: Select one: a. start-up, growth and maturity. b. economic, management and strategic. c. entity, going concern and matching. d. transactions, safety and speculative. e. None of the above.

d

Three strategies for managing the cash conversion cycle are: Select one: a. Maximise the average age of inventory, minimise the average collection period and minimise the average payment period. b. Minimise the average age of inventory, minimise the average collection period and minimise the average payment period. c. Minimise the average age of inventory, maximise the average collection period and maximise the average payment period. d. Minimise the average age of inventory, minimise the average collection period and maximise the average payment period. e. Maximise the average age of inventory, minimise the average collection period and maximise the average payment period.

d

Which of the following is a feature of equity financing? a. Owners have no say in the selection of management, either directly or indirectly b. Owners have a priority claim on earnings and assets c. Ordinary share capital must be repaid at maturity d. Drawing and dividends are optional

d

Which of the following statements concerning financial leases is true? Select one: a. They tend to be short-term. b. They are usually cancellable. c. The title to the asset usually passes to the borrower automatically at the end of the lease. d. They are treated as debt financing arrangements for the purchase of an asset, for both income tax and financial reporting purposes.

d

Which of the following statements concerning financial leases is true? a a. b. c. d. They are treated as debt financial arrangements for the purchase of an asset for both income tax and financial reporting purposes

d

Which of the following statements concerning the New Zealand dividend imputation tax system is true? a. b. c. d. It reduces the relative tax advantage of financing with debt compared with equity sources

d

Assuming sales remain constant, as the level of inventory decreases, then inventory holding costs ___________________, financing costs ________________ and profits ______________________.

decrease, decrease, increase

Managers who fail to act in a manner consistent with the wealth maximisation objective may: a. be rewarded with higher sales b. be fired c. cause the company share price to rise d. expose the company to a take-over bid. e. Both B and D

e

Successful firms may be able to obtain bank or financial institution financing by: Select one: a. pledging their accounts receivable. b. offering finished goods inventory as collateral for a short-term loan. c. factoring their accounts receivable. d. invoice discounting. e. all of the above.

e

The value of any assets depends on: a. the expected benefits to be received b. the expected timing of the financial benefits c. the expected magnitude of the benefits d. the expected risk of the asset e. All of the above

e

Which of the following are an example of agency costs? a. Legal costs associated with management employment contracts b. costs incurred to hire company auditors c. cost associated with offering share options to managers d. b and c e A, B and c

e

Which of the following is NOT likely to be a consequence of holding insufficient levels of inventory? a. Increased stock-outs b. Production bottlenecks c. Lost sales d. reduced inventory financing costs e. Increased investment in accounts receivable

e

Which of the following is not a principal function of financial management? a. Financial forecasting and planning b. preparing financial reports c. Financing the firm d. Investment in assets e. All of the above are principal functions of financial management

e

As a general rule of thumb, as an individual gets closer to retirement, they should consider moving more of thier retirement savings such as KiwiSaver, into ________ investments.

lower risk

The SAFETY motives induces firms to hold at least some cash balances for the purpose of:

maintaining additional cash balances to pay for day-to-day cash needs B and D only