Financial Management Online MCQ Set 13

QN01. The major problem when a public firm issues new stock is:

1. pricing the security
2. underwriting the issue
3. determining the spread
4. the dilution of existing stock

Answer

(D)the dilution of existing stock

QN02. The main pressure on Canadian corporations to raise capital has come from:

1. shareholder pressure
2. securities analysts
3. the expansion of the economy
4. institutional pressure

Answer

(C)the expansion of the economy

QN03. A call provision allows the firm to:

1. call the bond and common stock
2. redeem bonds prior to the call date
3. pay a discount 5-10% below par
4. redeem the bond prior to maturity

Answer

(D)redeem the bond prior to maturity

QN04. Preferred shareholders:

1. play a primary role in the financing of the firm
2. have a subordinated claim to dividends
3. possess an ownership interest in the firm
4. normally have no vote on corporate issues

Answer

(D)normally have no vote on corporate issues

QN05. When a rights offering is announced:

1. common shareholders may purchase one new share for each share owned
2. a stock will initially trade rights-on
3. the share price increases when the stock goes ex-rights
4. the shareholder increases the value of his holdings by exercising the rights

Answer

(B)a stock will initially trade rights-on

QN06. To institutional investors, preferred stock may be very attractive because:

1. dividend payments are assured
2. dividends from another corporation are usually tax-exempt
3. the preferred yield is normally higher than that of debt
4. it provides balance to the issuing firm's capital structure

Answer

(B)dividends from another corporation are usually tax-exempt

QN07. By maintaining a relatively stable dividend level, the firm:

1. hopes to increase holdings of its common shares
2. hopes to decrease holdings of its common shares
3. hopes to increase the discount rate applied to future dividends
4. hopes to decrease the discount rate applied to future dividends

Answer

(D)hopes to decrease the discount rate applied to future dividends

QN08. If investors are optimistic about expectations for the future performance of the underlying stock of a convertible security:

1. the conversion premium will be large
2. the conversion premium will be small
3. the bond is overpriced
4. the bond is underpriced

Answer

(A)the conversion premium will be large

QN09. Convertible securities are subject to all of the following disadvantages except:

1. interest rates are normally below market rates
2. the convertible is purchased at a premium
3. the holder has no downside protection
4. the convertible may be subject to a call provision

Answer

(C)the holder has no downside protection

QN10. All of the following are financial motives for mergers except:

1. the portfolio effect
2. the dividend effect
3. improved financing posture
4. tax loss carry-forwards

Answer

(B)the dividend effect

QN11. If the acquiring firm has a higher P/E ratio than the acquired firm, the resulting earnings per share will be:

1. the same as pre-merger
2. lower
3. higher
4. cannot be determined

Answer

(C)higher

QN12. Canadian exporters accounted for what percentage of Canada's total production of goods and services in 1997:

1. 15%
2. 25%
3. 35%
4. 50%

Answer

(C)35%

QN13. The forward rate is:

1. unrelated to the foreign exchange rate
2. the rate of exchange for future delivery
3. the rate of exchange for immediate delivery
4. the “black market” exchange rate

Answer

(B)the rate of exchange for future delivery

QN14. Political risk exposure may be minimized through all of the following except:

1. joint ventures with local entrepreneurs
2. joint ventures with firms from the countries
3. fully owned foreign subsidiaries
4. obtaining insurance in advance

Answer

(C)fully owned foreign subsidiaries

QN15. A main benefit to the corporate form of organization is:

1. double taxation of corporate income
2. simplicity of decision making and low organizational complexity
3. limited liability for the corporate shareholders
4. a major management role exists for the firm's owners

Answer

(D)limited liability for the corporate shareholders

QN16. The statement of cash flows:

1. measures changes in net income over time
2. the receipt and disbursement of funds of the firm
3. the assets of the firm and the means by which they are financed
4. emphasizes the critical nature of the firm's cash flows

Answer

(D)emphasizes the critical nature of the firm's cash flows

QN17. The current cost method of financial reporting takes inflation into account and has the greatest impact on:

1. the valuation of accounts receivable and marketable securities
2. inventory and plant and equipment
3. current assets
4. the determination of dividend policy

Answer

(B)inventory and plant and equipment

QN18. To the banker/creditor, the most important ratio group is:

1. asset utilization
2. profitability
3. liquidity
4. debt utilization

Answer

(C)liquidity

QN19. All of the following are primary considerations for cash payments except:

1. material costs
2. labour and overhead costs
3. receivable receipts
4. disbursements for general & administrative expenses

Answer

(C)receivable receipts

QN20. If management of an aggressive firm is apprehensive about economic conditions:

1. a highly leveraged approach should be maintained
2. a conservative approach should be implemented
3. the use of leverage should be tailored to the desired level of risk
4. the attitude of the firm has no impact

Answer

(B)a conservative approach should be implemented

QN21. A high degree of financial leverage:

1. is a sign of astute financial management
2. will always decrease the cost of financing for the firm
3. will result in an increase of the firm's overall value in all cases
4. may increase the firm's risk and drive the price of the shares down

Answer

(D)may increase the firm's risk and drive the price of the shares down

QN22. The cost of capital is:

1. used as an evaluation tool
2. based on the present cost obligation's of the firm
3. the cost of long-term investment
4. the cost of maintaining the bureaucrats in Ottawa

Answer

(A)used as an evaluation tool

QN23. A growth firm in a stable industry can normally afford to absorb how much debt relative to a firm in a cyclical industry:

1. more debt
2. less debt
3. about the same amount of debt
4. cannot be determined

Answer

(A)more debt

QN24. Financial capital:

1. appears under liabilities and equity on the corporate income statement
2. and the optimum capital structure are the same
3. consists of common stock, preferred stock and retained earnings only
4. consists of stocks, bonds and retained earnings

Answer

(D)consists of stocks, bonds and retained earnings

QN25. Perhaps the most important step in the decision making process is:

1. collection of data
2. search and discovery of investment opportunities
3. evaluation and decision making
4. re-evaluation and adjustment

Answer

(B)search and discovery of investment opportunities

QN26. The main difficulty in the capital budgeting process is:

1. determining where we want to be on the risk-return scale
2. finding viable investment opportunities
3. determining the appropriate discount rate
4. maximizing shareholder value

Answer

(A)determining where we want to be on the risk-return scale

QN27. All of the following are true regarding the use of simulation techniques except:

1. the computer randomly selects inputs from probability distributions
2. sensitivity testing allows for the asking of “what if” questions
3. its applications are limited in the area of capital budgeting
4. they generate a range of outcomes with standard deviations

Answer

(C)its applications are limited in the area of capital budgeting

QN28. The major supplier of funds for investment is:

1. the federal government
2. provincial and local governments
3. corporations and other business entities
4. households

Answer

(D)households

QN29. The strong form of the efficient market hypothesis states that:

1. past price information is unrelated to future prices
2. prices reflect all public information
3. both public and private information is reflected in security prices
4. prices reflect all private or inside information

Answer

(C)both public and private information is reflected in security prices

QN30. When new shares in a public firm are to be issued, the price will normally be established:

1. at the current market price
2. slightly above the current market price
3. slightly below the current market price
4. at whatever price the market will bear.

Answer

(C)slightly below the current market price

QN31. Payment to subordinated debenture holders takes place:

1. prior to payment to secured debt holders
2. prior to payment to senior debenture holders
3. after payment of preferred shareholders
4. after payment to senior debenture holders

Answer

(D)after payment to senior debenture holders

QN32. In most firms:

1. capital assets grow at a constant rate
2. the rate of growth for fixed and current assets remains constant
3. there is no relationship between the growth rates for fixed and current assets
4. capital assets grow slowly, while current assets fluctuate

Answer

(D)capital assets grow slowly, while current assets fluctuate

QN33. The term structure of interest rates:

1. shows the interest rate pattern for securities of different risks but equal maturities
2. shows the interest rate patterns for securities of equal risk with different maturities
3. is normally based on corporate securities
4. remains constant over time

Answer

(B)shows the interest rate patterns for securities of equal risk with different maturities

QN34. A firm with heavy risk exposure due to short term borrowing should:

1. carry a large amount of fixed assets
2. carry more highly liquid assets
3. increase production to avoid inventory
4. prosper in the event of a credit crunch

Answer

(B)carry more highly liquid assets

QN35. Internationally, a company may primarily prefer to hold cash balances in one currency over another for which of the following reasons:

1. higher interest rates and a stronger currency relative to others
2. the firm is headquartered in a particular country
3. twenty-four hour a day access may be available
4. there is no real reason to favor one currency over another

Answer

(A)higher interest rates and a stronger currency relative to others

QN36. The conditions of the terms of credit will have the greatest impact in which area:

1. the balance sheet
2. financing costs
3. accounts receivable
4. profit margin

Answer

(C)accounts receivable

QN37. Prime rate may best be defined as:

1. the rate the bank charges its most credit-worthy customers
2. the rate charged by the Bank of Canada to chartered banks
3. the rate paid by Canadian firms for eurodollar funds
4. the rate paid by firms on long term debt

Answer

(A)the rate the bank charges its most credit-worthy customers

QN38. A secured credit arrangement:

1. is never used with short-term funds
2. is always used with short-term funds
3. may help a borrower obtain otherwise unavailable funds
4. is a primary factor in the lender's decision

Answer

(C)may help a borrower obtain otherwise unavailable funds

QN39. The value today of a stream of payments received over the five year period is known as:

1. future value-annuity
2. present value-annuity
3. compound sum-single amount
4. present value-single amount

Answer

(B)present value-annuity

QN40. All of the following factors influence the investor's required rate of return except:

1. the real required rate of return
2. the inflation premium
3. the risk premium
4. the risk aversion factor

Answer

(D)the risk aversion factor