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
