Multiple Choice question in finance

Please review the attached document and answer all questions with explanations. Please provide as much detail as possible about each answer.

Please review the attached document and answer all questions with explanations. Please provide as much detail as possible about each answer.
1. Proper risk-return management means that
A) the firm should take as few risks as possible.
B) consistent with the objectives of the firm, an appropriate trade-off between risk and return should be determined.
C) the firm should earn the highest return possible.
D) the firm should value future profits more highly than current profits.
2. The partnership form of organization
A) avoids the double taxation of earnings and dividends found in the corporate form of organization.
B) usually provides limited liability to the partners.
C) has unlimited life.
D) simplifies decision making.
3. Future financial managers will need to understand
A) international cash flows.
B) computerized funds transfers.
C) international currency hedging strategies.
D) all of the above.
4. Which of the following is not a primary source of capital to the firm?
A) assets
B) common stock
C) preferred stock
D) bonds
5. The best indication of the operational efficiency of management is
A) net income.
B) earnings per share.
C) earnings before interest and taxes (EBIT).
D) gross profit.
6. A firm has $2,000,000 in its common stock account and $20,000,000 in its paid-in capital account. The firm issued 500,000 shares of common stock. What is the par value of the common stock?
A) $40 per share
B) $44 per share
C) $4 per share
D) $3.00 per share
7. The major limitation of financial statements is
A) in their complexity.
B) in their lack of comparability.
C) in their use of historical cost accounting.
D) in their lack of detail.
8. A short-term creditor would be most interested in
A) profitability ratios.
B) asset utilization ratios.
C) liquidity ratios.
D) debt utilization ratios.
9. ABC Co. has an average collection period of 60 days. Total credit sales for the year were $3,000,000. What is the balance in accounts receivable at year-end?
A) $50,000
B) $100,000
C) $500,000
D) $80,000
10. A firm has current assets of $75,000 and total assets of $375,000. The firm's sales are $900,000. The firm's fixed asset turnover is
A) 3.0x
B) 12.0x
C) 2.4x
D) 5.0x

Use the following to answer questions 11-18:
MEGAFRAME COMPUTER COMPANY
Balance Sheet
As of December 31, 2003

ASSETS

Cash $ 40,000
Accounts Receivable 60,000
Inventory 90,000
New Plant and Equipment 220,000
Total Assets $410,000

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts Payable $ 60,000
Accrued Expenses 40,000

Long-Term debt 130,000
Common Stock 60,000
Paid-In capita 20,000
Retained earnings 100,000
Total Liabilities and Stockholders' Equity $410,000

MEGAFRAME COMPUTER COMPANY
Income Statement
For the Year Ended December 31, 2003

Sales (all on credit) $720,000
Cost of Goods Sold 500,000
Gross Profit 220,000
Sales and Administrative Expense 20,000
Depreciation 40,000
Operating Profit 160,000
Interest Expense 16,000
Profit before Taxes 144,000
Taxes (30%) 43,200
Net Income $100,800

11. Using the DuPont method, return on assets (investment) for Megaframe Computer is approximately
A) 15%
B) 25%
C) 29%
D) 35%
12. The firm's average collection period is
A) 30 days.
B) 25 days.
C) 14.4 days.
D) 20 days.
13. Megaframe's quick ratio is
A) 2:1
B) 1:1
C) 1.6:1
D) 10:1
14. Megaframe's current ratio is
A) 1.9:1
B) 1.625:1
C) 1.5:1
D) 3.2:1
15. The firm's debt to asset ratio is
A) 56.1%
B) 47.22%
C) 33.33%
D) none of the above
16. What is Megaframe Computer's total asset turnover?
A) 4.50x
B) 3.6x
C) 2x
D) 1.76x
17. Compute Megaframe's after tax profit margin.
A) 10.0%
B) 14.0%
C) 15.4%
D) 20.0%
18. The firm's return on equity is
A) 52.8%
B) 55.6%
C) 56.0%
D) 100.0%
19. At the break-even point, a firm's profits are
A) greater than zero.
B) less than zero.
C) equal to zero.
D) Not enough information to tell
20. A highly automated plant would generally have
A) more variable than fixed costs.
B) more fixed than variable costs.
C) all fixed costs.
D) all variable costs.
21. Firms with a high degree of operating leverage are
A) easily capable of surviving large changes in sales volume
B) usually trading off lower levels of risk for higher profits.
C) significantly affected by changes in interest rates.
D) trading off higher fixed costs for lower per-unit variable costs.
22. Working capital management is primarily concerned with the management and financing of
A) cash and inventory.
B) current assets and current liabilities.
C) current assets.
D) receivables and payables.
23. A financial executive devotes the most time to
A) Long-range planning.
B) Capital budgeting.
C) Short-term financing.
D) Working capital management.
24. Ideally, which of the following types of assets should be financed with long-term financing?
A) Fixed assets only
B) Fixed assets and temporary current assets
C) Fixed assets and permanent current assets
D) Temporary and permanent current assets
25. What is generally the largest source of short-term credit small firms?
A) Bank loans
B) Commercial paper
C) Installment loans
D) Trade credit
26. In determining the cost of bank financing, which is the important factor?
A) Prime rate
B) Nominal rate
C) Effective rate
D) Discount rate
27. Analog Computers needs to borrow $800,000 from the Midland Bank. The bank requires a 15% compensating balance. How much money will Analog need to borrow in order to end up with $800,000 spendable cash?
A) $920,000
B) $1,058,264
C) $941,177
D) none of the above
28. Hedging refers to
A) avoiding high-risk investment opportunities.
B) a transaction that reduces risk exposure.
C) the same thing as asset diversification.
D) avoiding the financial futures market.
29. A dollar today is worth more than a dollar to be received in the future because
A) risk of nonpayment in the future.
B) the dollar can be invested today and earn interest.
C) inflation will reduce purchasing power of a future dollar.
D) None of the above.
30. If you were to put $1,000 in the bank at 6% interest each year for the next ten years, which table would you use to find the ending balance in your account?
A) Present value of $1
B) Future value of $1
C) Present value of an annuity of $1
D) Future value of an annuity of $1
31. The IF for the future value of an annuity is 4.5 at 10% for 4 years. If we wish to accumulate $8,000 by the end of 4 years, how much should the annual payments be?
A) $2,500
B) $2,000
C) $1,778
D) none of the above
32. A home buyer signed a 20-year, 8% mortgage for $72,500. Given the following information, how much should the annual loan payments be?
Present value of $1 PVIF = .2
Future value of $1 FVIF = 5.
Present value of annuity PVIFA = 9.818
Future value of annuity FVIFA = 46.0
A) $5,560
B) $7,384
C) $8,074
D) $13,900
33. Which of the following is not one of the components that makes up the required rate of return on a bond?
A) risk premium
B) real rate of return
C) inflation premium
D) maturity payment
34. Leasing is a popular form of financing because
A) lease provisions are generally less restrictive than a bond indenture.
B) the lessor likely has experience with the equipment being leased.
C) the lessee may not be financially able to purchase.
D) all of the above
35. Which of the following best represents the hierarchy of creditor and stockholder claims?
A) Common stock, senior secured debt, subordinated debentures
B) Senior debentures, subordinated debentures, junior secured debt
C) Senior secured debt, subordinated debentures, common stock
D) Preferred stock, secured debt, debentures.
36. A "subordinated debenture"
A) must be transferred with the bond to which it is attached.
B) is used mainly by railroad companies and usually specifies equipment as collateral.
C) entitles the bondholder to purchase shares of common stock at a specific price.
D) is an unsecured bond with an inferior claim on assets in the event of liquidation.
37. Long-term financing leases currently
A) show up on the balance sheet.
B) appear in the footnotes to the annual report.
C) appear on the company's statement of retained earnings.
D) do not appear on any financial statements.
38. The weighted average cost of capital is used as a discount rate because
A) it is an indication of how much the firm is earning overall.
B) as long as the cost of capital is earned, the common stock value of the firm will be maintained.
C) it is comparable to the prevailing market interest rates.
D) returns below the cost of capital will cover all fixed costs associated with capital and provide an excess return to stockholders.
39. Although debt financing is usually the cheapest component of capital, it cannot be used to excess because
A) interest rates may change.
B) the firm's stock price will increase and raise the cost of equity financing.
C) the financial risk of the firm may increase and thus drive up the cost of all sources of financing.
D) underwriting costs may change.
40. Which is not true about debt financing and the weighted average cost of capital?
A) Debt is usually the cheapest source of financing.
B) As the level of debt increases beyond the optimum capital structure, the cost of capital increases.
C) No debt in the firm's capital structure will minimize the firm's weighted-average cost of capital.
D) None of the above.
41. The Jersey Corporation has 70% of its capital structure in the form of equity capital. $150,000 in capital needs to be raised for a project but only $30,000 in funds is available through retained earnings. How much must be raised through common stock to maintain Jersey Corporation's capital structure?
A) $105,000
B) $75,000
C) $120,000
D) $21,000
42. The general rule for using the weighted average cost of capital (WACC) in capital budgeting decisions is accept all projects with
A) rates of return greater than or equal to the WACC.
B) rates of return less than the WACC.
C) rates of return equal to or less than the WACC.
D) positive rates of return.
43. Financial capital does not include
A) stock.
B) bonds.
C) preferred stock.
D) working capital.

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Solution Summary

The solution explains various multiple choice questions in finance including DOL, partnership, ratios, WACC and present value calculations