QN01. The field of finance is closely related to the fields of:
- statistics and economics
- statistics and risk analysis
- economics and accounting
- accounting and comparative return analysis
Answer
(C)economics and accounting
QN02. Which of the following properly lists balance sheet items in order of liquidity, from most liquid to least liquid?
- Accounts receivable, inventory, marketable securities, cash.
- Cash, marketable securities, accounts receivable, inventory.
- Inventory, marketable securities, cash, accounts receivable.
- Cash, inventory, accounts receivable, marketable securities.
Answer
(B)Cash, marketable securities, accounts receivable, inventory.
QN03. Amortization is considered a source of funds to the firm because:
- it is purely an accounting entry and doesn't involve a direct disbursement of funds, freeing up these funds for other investments
- it represents a reduction in asset holdings
- it represents an increase in an asset account
- amortization is not a source of funds
Answer
(A)it is purely an accounting entry and doesn't involve a direct disbursement of funds, freeing up these funds for other investments
QN04. Profitability ratios measure:
- the speed at which the firm is turning over its assets
- the ability of the firm to earn an adequate return on sales, total assets, and invested capital
- the firm's ability to pay off short term obligations as they are due
- the debt position of the firm in light of its assets and earning power
Answer
(B)the ability of the firm to earn an adequate return on sales, total assets, and invested capital
QN05. Receivables turnover is:
- a profitability ratio
- a debt utilization ratio
- an asset utilization ratio
- a liquidity ratio
Answer
(C)an asset utilization ratio
QN06. Financial ratios are used to:
- weigh and evaluate the operating performance of the firm
- provide an absolute benchmark of industry performance
- determine which firm will provide the highest return to investors
- None of the above are correct
Answer
(A)weigh and evaluate the operating performance of the firm
QN07. The construction of the pro forma income statement is based on:
- the prior year's income statement
- sales projections and the production plan
- the cash budget
- the cash budget and prior year's income statement
Answer
(B)sales projections and the production plan
QN08. The primary purpose of the cash budget is:
- to break the income statement down into monthly periods
- to determine monthly cash receipts
- to determine the collection pattern
- to allow the firm to anticipate the need for outside funding
Answer
(D)to allow the firm to anticipate the need for outside funding
QN09. Operating leverage may be defined as:
- the degree to which debt is used in financing the firm
- the difference between price and variable costs
- the extent to which capital assets and fixed costs are utilized
- the difference between fixed costs and the contribution margin
Answer
(C)the extent to which capital assets and fixed costs are utilized
QN10. Financial leverage:
- reflects the firm's commitment to fixed, financial assets
- has no impact on the earning of the firm
- reflects the amount of debt used in the capital structure of the firm
- primarily affects the left side of the balance sheet
Answer
(C)reflects the amount of debt used in the capital structure of the firm
QN11. Most retail stores are mainly concerned with:
- their buyers' forecasts for the coming season
- matching sales and inventory levels
- decreasing inventory turnover
- their investment in capital assets
Answer
(B)matching sales and inventory levels
QN12. The liquidity premium theory suggests that long-term interest rates are higher than short-term interest rates because:
- investors generally prefer to invest short periods of time
- government policy maintains this relationship
- there is greater risk in long-term bonds
- exchange rate fluctuations establish this relationship
Answer
(C)there is greater risk in long-term bonds
QN13. Using a lockbox system to improve collections:
- is more expensive than the use of collection centers
- utilizes local banks to clear local payments made to the collection center
- provides more float than collection centers
- results in checks being forward to a P.O. box and clearing through local banks
Answer
(D)results in checks being forward to a P.O. box and clearing through local banks
QN14. All of the following are factors influencing the choice of marketable securities except:
- yield
- maturity
- marketability
- maximum investment allowed
Answer
(D)maximum investment allowed
QN15. In establishing credit standards, the firm must consider the nature of the credit risk based on all of the following, except:
- prior record of payment
- terms of credit
- financial stability
- current net worth
Answer
(B)terms of credit
QN16. A cash discount may best be defined as:
- a reduction in price if payment is made within the specified time period
- a discount offered to critical suppliers
- a discount applied to volume sales
- a discount or the repayment of the firm's debt
Answer
(A)a reduction in price if payment is made within the specified time period
QN17. Commercial paper may best be defined as:
- a short term obligation of the government issued to commercial investors
- short term unsecured promissory notes issued by corporations
- an insignificant source of funds to large corporations
- the debt obligations of chartered banks
Answer
(B)short term unsecured promissory notes issued by corporations
QN18. The extent to which inventory financing may be employed is based on all of the following, except:
- the marketability of the pledged goods
- their associated price stability of the goods
- the perishability of the goods
- the control of the goods by the manufacturer
Answer
(D)the control of the goods by the manufacturer
QN19. If interest or compounding is done on other than an annual basis, adjust by:
- dividing the number of years by the number of compounding periods
- multiplying the number of years by the number of compounding periods
- dividing the interest rate by the number of compounding period
- multiplying the years and dividing the interest rate by the number of compounding periods
Answer
(D)multiplying the years and dividing the interest rate by the number of compounding periods
QN20. Annuity payments are generally assumed to occur:
- during the period
- at the beginning of the period
- at the end of the period
- it doesn't matter when they occur
Answer
(C)at the end of the period
QN21. The valuation of a financial asset is based on determining:
- the present value of future cash flows
- the current yield to maturity on long term corporate bonds
- the capital budgeting process
- what the corporation is paying to attract preferred shareholders
Answer
(A)the present value of future cash flows
QN22. When the coupon rate on a bond is equal to the yield to maturity, the price of the bond will be:
- par
- above par
- below par
- more information is required
Answer
(A)par
QN23. To determine the price of preferred stock:
- divide the rate of return by the dividend amount
- divide the dividend amount by the rate of return
- divide the dividend amount by the rate of return minus the growth rate
- divide the dividend amount by the growth rate
Answer
(B)divide the dividend amount by the rate of return
QN24. One assumption underlying the use of the cost of capital to analyze capital projects is that:
- current costs will remain the same
- capital structure will vary with the type of financing
- different risk projects are required to diversify the firm
- the analyzed projects are of comparable risk to existing projects
Answer
(D)the analyzed projects are of comparable risk to existing projects
QN25. The cost of retained earnings is equal to:
- the return on new common stock
- the return on preferred stock
- the return on existing common stock
- It does not have a cost.
Answer
(C)the return on existing common stock
QN26. The capital budgeting decision involves the planning of expenditures for projects with a life of at least:
- one year
- five years
- ten years
- fifteen years
Answer
(A)one year
QN27. Under the payback period:
- we compute the time required to recoup the original investment
- there is no consideration of inflows after the cutoff period
- the time value of money is ignored
- all of the above are correct
Answer
(D)all of the above are correct
QN28. All of the following are true of capital cost allowance except:
- it is a non-cash expense
- it is not tax-deductible
- it provides tax shield benefits
- it should not be disregarded in capital budgeting decisions
Answer
(B)it is not tax-deductible
QN29. The standard deviation:
- is the square root of the variance
- measures dispersion or variability around the expected value
- may be used to compare investments with the same expected return
- all of the above are correct
Answer
(D)all of the above are correct
QN30. The efficient frontier represents:
- the difference between investment returns
- optimal risk-return tradeoffs
- the correct investment for all firms to make
- the correlation between profits and the portfolio effect
Answer
(B)optimal risk-return tradeoffs
QN31. Which of the following constitutes an internal source of funds:
- corporate bonds
- common stock
- commercial paper
- retained earnings and amortization cash flow
Answer
(D)retained earnings and amortization cash flow
QN32. It would be fair to say that securities markets in the future:
- will become more competitive as an international market system develops
- will be less efficient
- will be more highly segregated than they are today
- will be less automated than today's markets
Answer
(A)will become more competitive as an international market system develops
QN33. The spread may best be defined as:
- the compensation due the lead underwriter
- the total compensation for those participating in the distribution process
- the price finally paid by the public for the shares
- the proceeds from the distribution received by the firm
Answer
(B)the total compensation for those participating in the distribution process
QN34. Private placement involves selling securities directly to:
- insurance companies
- pension funds
- wealthy individuals
- all of the above are correct
Answer
(D)all of the above are correct
QN35. Debt that is not secured by specific assets is called:
- an indenture
- a debenture
- a mortgage agreement
- common stock
Answer
(B)a debenture
QN36. In a lease versus borrow to purchase decision the appropriate discount rate, except for the salvage value, is:
- the cost of capital
- the aftertax cost of debt
- the cost of equity capital
- the cost of the debt
Answer
(B)the aftertax cost of debt
QN37. Preferred equity has all of the following characteristics except:
- fixed dividends
- the cumulative right to annual dividends
- precedence over common stock dividends
- residual claim to income
Answer
(D)residual claim to income
QN38. Under the marginal principle of retained earnings:
- the firm must compare what it can earn with what shareholders could earn on funds if they were distributed
- all funds above and beyond retained earnings are paid to shareholders
- funds not paid to creditors and preferred shareholders belong to common shareholders
- all projects are financed internally
Answer
(A)the firm must compare what it can earn with what shareholders could earn on funds if they were distributed
QN39. A stock dividend:
- represents a distribution of additional shares to common shareholders
- differs from a stock split largely in size
- normally has no real value to the investor
- all of the above are correct
Answer
(D)all of the above are correct
QN40. A convertible security is:
- convertible into cash at the option of the holder
- a bond or share of preferred, convertible into common at the firm's option
- a bond or share of preferred, convertible into common at the holders' option
- a security convertible into a debenture at the holder's option
Answer
(C)a bond or share of preferred, convertible into common at the holders' option
