Finance Final Quiz Questions

Which of the following questions is NOT one that break even analysis attempts to address?

Is the current profit sustainable

a company experiencing rapid price increases for its products would take the most conservative approach by using which accounting method

LIFO

The term permanent current assets, implies

Some minimum level of current assets that are not self-liquidating

If fixed costs rise while other variables stay constant, all of the following happen BUT

The breakeven point rises

cash flow does not rely on which of the following?

The monetary policy of the federal reserve

Financial Leverage Deals with

The relationship of debt and equity in the capital structure

which of the following are not one of the three methods used for ranking investments

WACC

Generally, more use is made of short term financing because

a and b above (short term interest rates are generally lower than long term interest rates & most firms do not have easy access to the capital markets.)

the need for an increase or decrease in short term borrowing can be predicted by

a cash budget

Automated clearinghouses are commonly used by consumers to make direct payments for

a insurance premiums b. mortgage payments c. utility bills

Float takes place because

a large exists between writing a check and clearing it through the banking system

a quick ratio much smaller than the current ratio reflects

a large portion

the ikey initioal element in developing pro forma statements is

a sales forecase

An annuity may be defined as

a series of consecutive payments of equal amounts

a firms debt to equity ratio varies at times because

a. a firm will want to sell common stock when prices are high and bonds when interest rates are low. v. a firm will want to take advantage of timing its fund raising in order to minimize costs over the long run c. the market allows some leeway in the debt to equity ratio before penalizing the firm with a higher cost of capital

the reason cash flow is used in capital budgeting is because

a. cash rather than income is used to purchase new machines b. cash outlays need to be evaluated in terms of the present value of the resultant cash inflows c. to ignore the tax shield provided from depreciation would ignore the cash flow provided by the machine, which should be reinvested to replace older machines

both the future and present value of a sum of money are based on

a. interest rate b. number of time periods

The concept of time value of money is important to financial decision making because

a. it emphasizes earning a return on invested capital b. it recognizes that earning a return makes $1 worth more today than $1 received in the future c. it can be applied to future cash flows in order to compare different streams of income

time value of money is an important finance concept because

a. it takes risk into account b. it takes time into account c. it takes compound interest into account

A multinational company may prefer to hold sizable cash balances in one currency rather than another because

a. of high interest rates existing in one country b. one country's currency may be strong relative to the dollar

A corporation is

a. owned by stockholders who enjoy the privilege of limited liability B. easily divisible between owners C. a separate legal entity

an appropriate capital budgeting process requires that the following steps be taken in which order?

a. search for and discovery of investment opportunities b.collection of data c.evaluation and decision making d.reevaluation and adjustment

in examining the liquidity ratios, the primary emphasis is on the firms a

ability to pay short term obligations on time

Total asset turnover indicates the firm's

ability to use its assets to generate sales

When actual sales are greater than forecsated sales all but which of the following will happen

accounts payable will decline

Money market funds are

accounts that allow small investors to participate in buying large denomination securities

in order to estimate production requirements, we

add projected sales in units to desired ending inventory and subtract beginning inventory

institutional investors are important in today's business world because

all of the above a. as large investors they have more say in how businesses are managed . they have a fiduciary responsibility to the workers and investors that they represent to c. aa group they can vote large blocks of stock for the election of board members

The term structure of interest rates

all of the above a. is an indication of investors' expectations about inflation and future interest rates b. will be downward sloping if short term interest rates are higher than long term rates c. will be upward sloping under normal conditions

If sales volume exceeds the break even point, the firm will experience

an operating profit

valuation of financial assets requires knowledge of

appropriate discount rate future cash flows

If a firm uses level production with seasonal sales

as sales decline inventory will increase

investors and financial analysts wanting to evaluate the operating efficiency of a firm's managers would probably look primarily at the firm's

asset utilization ratios

which of the following is not a primary source of caital to the firm?

assets

the net present value method is a more conservative technique for selecting investment projects than the IRR method because NPV method

assumes that cash flows are reinvested at the firm's weighted average cost of capital

The partnership form of an organization

avoids the double taxation of earnings and dividends found in the corporate form of organization

which of the following is not one of the five things that influence a company's price/earnings ratio

bookk value

net cash flow is equal to

caah receipts minus cash payments

Risk exposure due to heavy short-term borrowing can be compensated for by

carrying highly liquid assets

the pro forma income statement is important to the overall process of constructing pro forma statements because it allows us to determine a value for

change in retained earnings

the most subjective and also significant segment of the 5 c's of credit for giving final approval is

character

which of the following securities represents an unsecured promissory note issued by a corporation?

commercial paper

Which of the following financial assets is likely to have the highest rate of return based on risk

common stock

theoretically to whom do the reinvested finds from retained earnings belong?

common stockholders

ratio analysis can be useful for all of the following except

comparison of ratios across different types of industries

Whar form of business organization has the most sales in dollars than any other form of business organizaiton

corporation

in the construction of the cash payment schedule, what is generally the major cash payment?

costs associated with manufacturing inventory

working capital management is primarily concerned with the management and financing of

current asets

industries most sensitive to inflation induced profits are those with what type of products

cyclical

a long term creditor would be most interested in

debt utilization ratios

The best indication of the operation efficiency of management is

earnings before interest and taxes (EBIT)

At the break even point, a firms profits are

equal to zero

In developing in the pro forma income statement we follow four important steps

establish a sales projection determine a production schedule compute other expenses determine profit by completing the actual pro forma statement

capital budgeting is primarily concerned with

evaluating investment alternatives

a firm might need to increase borrowing if they

experience a rapid growth in sales and profits

When the term structure of interest rates is downward sloping and interest rates are expected to decline, the

financial manager generally borrows short-term

Ideally, which of the following types of assets should be financed with long term financing?

fixed assets and permanent current assets

The concept of operating leverage invlolves the use of ___________ to magnify returns at high levels of operation

fixed costs

the difference between the amound of casho n the firms books and the amount credited to it by the bank is

float

If a company's stock price (Po) goes up, and nothing else changes, Ke (the required rate of return

goes down

If the inflation premium for a bond goes up, the price of the bond

goes down

A conservative financing plan involves

heavy reliance on equity

which company is able to use depreciation to shield more of their taxes, a company in a high tax bracket or a low tax bracket?

high

the major limitation of financial statements is

in their use of historical cost acocunting

Which of the following is a source of funds

increase in accounts payable

If a firms bonds are currently yielding 6% in the market place, why would the firms cost of debt be lower

interest is tax deductible

why is the cost of debt normally lower than the cost of preferred stock?

interrest is tax deductable

which of the following would not be classified as a current asset

investments

The economic order quantity

is the lowest cost amount to order considering all costts

the after tax cost of preferred stock to the issuing corporation

is the same as the before tax cost

When a firm employs no debt

it has a financial leverage of one

depreciation is a source of cash inflow because

it is a tax deductive noncash expense

as the cost for capital for the organization increases, what happens with the project selection process?

less projects are accepted

In the last decade, free cash flow has been associated with special financial activities such as

leveraged buyouts

Assets accounts re listed on the balance sheet in the order of

liquidity

in managing cash and marketable securities, what should the managers primary concern be?

liquidity and safety

A a short term creditor would be most interested in

liquidity ratios

a firm that wishes to minimize risk when investing idle cash would be LEAST likely to buy

long term corporate bonds

one of the major advantages of a sole proprietorship is

low operating costs

One advantage of level production is that

manpower iand equipment are used eficiently at a lower cost current

which department in the company might be best able to predict future sales

marketing

which of the following is not one of the components that makes up the required rate of return on a bond

maturity payment

What is the primary goal of financial management

maximizing shareholder wealth

A highly automated plant would generally have

more fixed than variable costs

the future value of a dollar that you invest today is

more than a dollar

Agency theory examines the relationship between the

owners of the firm and the managers of the firm

which of the following is not a time-adjusted method for ranking investment proposals?

payback method

A common stock which pays a constant dividend can be valued as if it were

preferred stock

which is a characteristic of the cost of preferred stock?

preferred stock is valued as a perpetuity

how much must you invest at 10% interest in order to see your investment grow to $5000 in 5 years

present value of a lump sum

if you win the lottery and you choose to have you proceeds distributed to you over a twenty year time period, which calculation would you use to calculate the worth of those proceeds to you today

present value of an annuity

in a general sense, the value of any asset is the

present value of the cash flows received from the asset

In break even analysis the contribution margin is defined as

price minus variable costs

When a corporation uses the financial markets to raise new funds, the sale of securities is

primary market

in the development of the pro forma financial statements, the last step in the process is the development of the

pro forma balance sheet

which two ratios are used in the du pont system to create return on assets

profit margin and asset turnover

the most rigorous test of a firm's ability to pay its short term obligations is its

quick ratio

Pressure for current asset buildup often results from

rapidly expanding sales

which of the following is not a valid quantitive measure for accounts receivable collection policies

ratio of debt to equity

The financial markets allocate capital to corporations by

reflecting expectations of the market participants in the price of the corporations stock

for many firms the cheapest and most important source of equity capital is the form of

retained earnings

which of the following is not an asset utilization ratio?

return on assets

A weakness of breakeven analysis is that it assumes

revenue and costs are a linear (constant) function of volume

The market allocates capital to companies based on

risk efficiency expected returns

gross profit is equal to

sales minus cost of goods sold

a firm utilizing LIFO inventory accounting would, in calculating gross profits, assume that

sales were from current production was depleted, and then use sales from beginning inventory

how do you calculate gross profits

sales-cost of goods sold

Retail companies like target and the limited exhibit sales patterns that are mostly influenced by

seasonality

Money markets would include which of the following securities

short term treasury bills and 3 month CD's

What is the most common form of business in the united statees

sole propretorship

Agency problems are least likely to arise n which organizational form

sole proprietorship

which of the following is not one of the three basic financial statements

sttement of retained earings

One of the major disadvantages of a sole proprietorship is

that there is an unlimited liability to the owner

the internal rate of return assumes that cash flows can be reinvested at what rate

the IRR

which of the following financial statements represents the assets liabilities the owner's equity of a company at a given point in time

the balance sheet

an increasing average collection period indicates

the company is becoming less efficiency in its collection policy

a dollar today is worth more than a dollar to be received in the future because

the dollar can be invested today and earn interest

the cost of equity capital i the form of new common stock will be higher than the cost of retained earnings because of

the existence of flotation costs

Although debt financing is usually the cheapest component of capital it cannot be used in excess because

the financial risk of the firm may increase and thus drive up the cost of all sources of financing

There may be a change in the marginal cost of capital curve because

the firm has exhausted its supply of retained earnings.

Proper risk return management means that

the firm must determine an appropriate trade off between risk and return

in general, the larger the portion of a firm's sales that are on credit,

the higher will be the firm's need to borrow

The three primary credity policy administration variables to onsider when extending credit include all of the following except

the level of interest rates

which of the following statements about the "payback method' is true

the payback method does not consider the time value of money

preferred stock has all but which of the following characteristics?

the same binding contractual obligation as debt

if projects are mutually exclusive

the selection of one alternative precludes the selection of other alternatives

The pre tax cost of debt for a new issue of debt is determined by

the yield to maturity of outstanding bonds

A high degree of operating leverage means

there are high fixed costs

Retained earnings has a cost associated with it because

there is an opportunity cost associated with stockholder funds

Which of the following is not a valid reason for holding cash?

to earn the highest return possible

Probably the safest and most marketable instrument for short term investment is

treasury bills

suppose that interest rates (wacc) increase. this WOULD NOT CHANGE the capital budgeting choices a firm would make if it

uses payback method analysis

The overall weighted average cost of capital is used instead of costs for specific sources of funds because

using the cost for specific sources of capital would make investment decisions inconsistent

the value of a common stock is based on its

value of future benefits to the holder

each project should be judged against the

weighted average cost of capital

under what conditions must a distinction be made between money to be received today and money to be received in the future

when idle money can earn a positive return

a higher growth rate in sales in general

will require more external funds

Financial capital does not include

working capital

A financial executive devotes the most time to

working capital management