Financial Management Online MCQ Set 15

QN01. The cost of capital is best calculated with:

1. market value weightings
2. book value weightings
3. Modigliani and Miller weightings
4. It doesn't matter.

Answer

(A)market value weightings

QN02. Regardless of the type of asset being acquired, the appropriate discount rate is:

1. the aftertax cost of debt
2. the required rate of return
3. the weighted average cost of capital
4. the cost of equity capital

Answer

(C)the weighted average cost of capital

QN03. The biggest problem facing a manager is:

1. the cost of financing
2. competitive pressures
3. the farther out the time horizon moves, the greater the uncertainty
4. changing economic conditions

Answer

(C)the farther out the time horizon moves, the greater the uncertainty

QN04. One of the main advantages of the payback period is:

1. it is easy to use and places a premium on liquidity
2. it ignores the time value of money
3. all inflows related to the decision are considered
4. outflows are equated with inflows using the rate of return

Answer

(A)it is easy to use and places a premium on liquidity

QN05. The internal rate of return method:

1. does not consider inflows after the cutoff period
2. calculates the interest rate that equates outflows with subsequent inflows
3. determines the time required to recoup the initial investment
4. determines whether future benefits justify current expenditures

Answer

(B)calculates the interest rate that equates outflows with subsequent inflows

QN06. With mutually exclusive projects:

1. both projects can be accepted
2. the project with the higher NPV is accepted
3. both projects are rejected
4. only one project is accepted

Answer

(D)only one project is accepted

QN07. All of the following are true of the coefficient of variation except:

1. it eliminates the size difficulty resulting from standard deviation
2. it is computed by dividing the standard deviation by the expected value
3. it measures the volatility of returns relative to the market
4. the larger the coefficient of variation, the greater the risk

Answer

(C)it measures the volatility of returns relative to the market

QN08. Projects that increase the overall risk level of the firm:

1. should not be undertaken
2. should be discounted at the firm's cost of capital
3. should be discounted at a rate higher than the cost of capital
4. will have a low standard deviation

Answer

(C)should be discounted at a rate higher than the cost of capital

QN09. The extent of correlation among projects is represented by:

1. the coefficient of correlation
2. the coefficient of variation
3. the standard correlation coefficient
4. the variance

Answer

(A)the coefficient of correlation

QN10. One of the main purposes of the capital markets is:

1. to provide access to short-term funds
2. to provide access to long term funds
3. to allocate capital to the most efficient user
4. to set various interest rates

Answer

(C)to allocate capital to the most efficient user

QN11. Which of the following characteristics of financial intermediaries is incorrect:

1. they are the interface between suppliers and demanders of funds
2. they increase the cost of funds to corporation and governments
3. they help make the flow of funds efficient and competitive
4. they include banks, mutual funds, and credit unions

Answer

(B)they increase the cost of funds to corporation and governments

QN12. All of the following are typically key roles of the investment dealer except:

1. underwriter
2. market maker
3. broker
4. advisor to the firm

Answer

(C)broker

QN13. The main function of syndicate members is:

1. acting as the agent of the firm
2. selling shares to the public
3. determining the spread
4. wholesaling shares to brokers and dealers

Answer

(D)wholesaling shares to brokers and dealers

QN14. One of the main reasons an initial public offering (IPO) may do well in the after market is:

1. stabilization by the underwriters
2. stabilization by the firm
3. public misconceptions of the firm's value
4. the security was underpriced

Answer

(D)the security was underpriced

QN15. New equity financing is primarily done by way of a:

1. public offering
2. private offering
3. rights offering
4. leveraged offering

Answer

(A)public offering

QN16. The par value of a bond is:

1. the initial or face value of the bond
2. the yield to maturity
3. the stated interest payment
4. the value of the bond as traded on security markets.

Answer

(A)the initial or face value of the bond

QN17. Bond yields are quoted in all of the following ways except:

1. coupon rate
2. current yield
3. yield to maturity
4. debt yield

Answer

(D)debt yield

QN18. Leasing offers all of the following advantages except:

1. leases are an expense item that cannot be capitalized
2. the provisions of a lease may be less restrictive than a bond indenture
3. there may be no down payment requirement
4. creditor claims may be restricted on real property

Answer

(A)leases are an expense item that cannot be capitalized

QN19. The ultimate ownership of the firm resides:

1. with management
2. with common shareholders
3. with preferred shareholders
4. with bondholders

Answer

(B)with common shareholders

QN20. The most important voting issue for common shareholders is:

1. election of the board of directors
2. dividend policy
3. proxy assignment
4. adoption of the annual report

Answer

(A)election of the board of directors

QN21. With cumulative dividends:

1. preferred stock may participate over and above the quoted yields
2. the preferred shareholder is assured of receiving a dividend every year
3. preferred dividends accumulate and must be paid in full
4. the firm's obligation to its shareholders is lessened

Answer

(C)preferred dividends accumulate and must be paid in full

QN22. In terms of decreasing return to the investor, the proper ranking would be:

1. common stock, long-term government debt, preferred stock
2. long-term government debt, common stock, preferred stock
3. preferred stock, common stock, secured debt
4. common stock, secured debt, treasury bills

Answer

(D)common stock, secured debt, treasury bills

QN23. Most of the firm's shareholders will prefer:

1. floating dividends that vary with the firm's performance
2. stable dividends over time
3. that funds be reinvested as retained earnings
4. stock dividends

Answer

(B)stable dividends over time

QN24. A corporation will typically pay moderate dividends in:

1. Development-Stage I
2. Growth-Stage II
3. Expansion-Stage III
4. Maturity-Stage IV

Answer

(C)Expansion-Stage III

QN25. Dividends are quoted –––––––––, but paid ––––––––– :

1. quarterly, annually
2. annually, quarterly
3. annually, semi-annually
4. annually, monthly

Answer

(B)annually, quarterly

QN26. The difference between futures and forwards is:

1. that forwards are standardized and futures customized contracts
2. that most forwards are exercised and most futures closed out before expiry
3. that futures predetermine the price of an underlying commodity, but a forward price is flexible
4. that forwards are on currencies, and futures on interest rates

Answer

(B)that most forwards are exercised and most futures closed out before expiry

QN27. The conversion price is equal to:

1. the conversion ratio/face value of the bond
2. the conversion ratio times the face value of the bond
3. the common share price/conversion ratio
4. face value of the bond/conversion ratio

Answer

(C)the common share price/conversion ratio

QN28. One of the main ways of forcing conversion is:

1. calling the bond
2. offering bonus shares of stock as an incentive
3. decreasing the conversion price over time
4. none of the above are correct

Answer

(A)calling the bond

QN29. The takeover tender offer could have at least one of the following occur:

1. Turn to a white knight
2. Sell the crown jewels
3. Adopt a shareholders rights plan
4. All of the above

Answer

(D)All of the above

QN30. In determining the price to be paid for an acquisition, management should consider:

1. earnings
2. dividends
3. growth potential
4. all of the above should be considered

Answer

(D)all of the above should be considered

QN31. In a stock-for-stock exchange, shareholders of the acquired firm are most concerned with:

1. earnings
2. dividends
3. book value exchanged
4. market value exchanged

Answer

(D)market value exchanged

QN32. The portfolio effect, with respect to the P/E ratio:

1. has less of an influence than the projected growth rate
2. may have as much of an effect as the projected growth rate
3. has more of an effect than the projected growth rate
4. should not be a consideration

Answer

(B)may have as much of an effect as the projected growth rate

QN33. When an independent local producer uses a firm's technology in return for a royalty fee, the arrangement is called:

1. a joint venture
2. a licensing agreement
3. an export arrangement
4. a foreign subsidiary

Answer

(B)a licensing agreement

QN34. The idea that the differences in returns earned in different countries affects exchange rates is referred to as:

1. the interest rate parity theory
2. the purchasing power parity theory
3. the balance of payments parity theory
4. none of the above are correct

Answer

(A)the interest rate parity theory

QN35. Translation or accounting exposure primarily affects:

1. foreign assets and liabilities
2. domestic assets and liabilities
3. reported earnings
4. the repatriation of earnings.

Answer

(A)foreign assets and liabilities

QN36. Capital is allocated by financial markets by:

1. a lottery system between investment dealers
2. pricing securities based on their risk and expected future cash flows
3. by pricing risky securities higher than low-risk securities
4. by a government risk-rating system based on AAA for low risk and CCC for high risk

Answer

(B)pricing securities based on their risk and expected future cash flows

QN37. The three primary sources of capital to the firm are:

1. net income, retained earnings, and bank loans
2. bondholders, preferred shareholders, and common shareholders
3. operating profits, extraordinary gains, dividends
4. amortization cash flow, net income, and retained earnings

Answer

(B)bondholders, preferred shareholders, and common shareholders

QN38. Net worth or the book value of the firm is computed:

1. total assets minus shareholders' equity
2. total assets minus the firm's liabilities
3. preferred stock plus common stock plus retained earnings
4. shareholders equity minus preferred stock

Answer

(D)shareholders equity minus preferred stock

QN39. All of the following areas of cash flows are analyzed except:

1. operations activities
2. uses of funds
3. investing activities
4. financing activities

Answer

(B)uses of funds

QN40. Return on assets is computed:

1. net income/sales
2. net income/total assets
3. net income/current assets
4. income before interest and taxes (EBIT)/total assets

Answer

(B)net income/total assets