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Finance questions

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True/False . Please indicate if the statement is True or False in the space provided below.

1. The break-even model expresses the volume of output as a unit quantity.

2. According to the DuPont Analysis, an increase in net profit margin will decrease
return on assets.

3. A new issue of common stock is considered a primary market transaction in the
money market.

4. When forecasting statements, assets always increase proportionately to sales
regardless of capacity.

5 If we invest money for 10 years at 8% interest, compounded semi-annually, we are
really investing money for 20 six-month periods, during which we receive 4% interest each period.

6. The same basic formula is used for computing both the computation of future value and of present value.

7 The goal of the firm should be the maximization of profit.

8. Both the IRR rule and the accounting rate of return rule take into consideration the time value of money.

9. The IRR assumes that cash flows are reinvested at the cost of capital.

10. The largest cash receipts for a firm come from accounts payable.

11. There are no disadvantages to the Net Present Value method.

12. Corporate profits play a part in the choice firms make between using internal versus external capital.

13. Because the 2% discount is so small, terms of credit such as 2/10 net 30 do not have much affect on accounts receivable management.

14. The capital budgeting decision-making process involves measuring the
incremental cash flows of an investment proposal and evaluating the attractiveness of these cash flows relative to the project's cost.

15. Projects are said to be mutually exclusive when undertaking one prevents doing
the other(s).

16. The weighted average cost of capital is the minimum required return that must be earned on additional investment if firm value is to remain unchanged.

17. An increase in financial leverage will increase earnings before income and taxes
(EBIT).

18. Economies of scale are created when sharing of resources increases a firm's productivity.

19. Leading and lagging are financial techniques used to eliminate risk.

20. Financial ratios comprise the principal tool of financial analysis since they can be
used to answer a variety of questions regarding a firm's financial condition.

Multiple Choice.

1. Which of the following statements about the percent-of-sales method of financial
forecasting is true?
a. It is the least commonly used method of financial forecasting.
b. It is a much more precise method of financial forecasting than a cash budget would be.
c. It involves estimating the level of an expense, asset, or liability for a future period as a percent of the forecast for sales revenues.
d. It projects all liabilities as a fixed percentage of sales.

2. At 8% compounded annually, how long will it take $750 to double?
a. 6.5 years
b. 48 months
c. 9 years
d. 12 years

3. Which costs should be included when calculating the degree of operating leverage?
a. Depreciation
b. Administrative expenses
c. Real estate taxes
d. Both b and c
e. All of the above

4. What is the payback period for a $20,000 project that is expected to return $6,000 for the first two years and $3,000 for Years 3 through 5?
a. 3 1/2
b. 4 1/2
c. 4 2/3
d. 5

5. An increase in ___________________ would increase a firm's liquidity.
a. notes payable
b. inventories
c. cash
d. both b and c
e. all of the above

6. A company is technically insolvent when:
a. cash outflows in a given period are greater than cash inflows.
b. earnings before interest payments are less than the interest payments.
c. it lacks the necessary liquidity to promptly pay its current debt obligations.
d. the current ratio is less than 1.0.

7. Dieyard Battery Recyclers is considering a project with the following cash flows:
Initial outlay = $13,000
Cash flows: Year 1 = $5,000
Year 2 = $3,000
Year 3 = $9,000
If the appropriate discount rate is 15%, compute the NPV of this project.
a. $4,000
b. -$466
c. $27,534
d. $8,891

8. In the basic model, the optimal inventory level is the point at which:
a. total cost is minimized.
b. total revenue is maximized.
c. carrying costs are minimized.
d. ordering costs are minimized.

9. Which of the following techniques may not consider ALL cash flows of a project?
a. Net present value
b. Internal rate of return
c. Payback period
d. Modified internal rate of return

10. Cost of capital is:
a. the coupon rate of debt.
b. a hurdle rate set by the board of directors.
c. the rate of return that must be earned on additional investment if firm value is to remain unchanged.
d. the average cost of the firm's assets.

11. Verigreen Lawn Care products just paid a dividend of $1.85. This dividend is expected to grow at a constant rate of 3% per year, so the next expected dividend is $1.90. The stock price is currently $12.50. New stock can be sold at this price subject to flotation costs of 15%. The company's marginal tax rate is 40%. Compute the cost of internal (retained) earnings and the cost of external equity (new common stock).
a. 0, 17.8%
b. 15.2%, 17.8%
c. 18.2%, 20.9%
d. 18.2%, 16.21%

12. The Independence Hypothesis states that the use of a greater degree of leverage might result in greater:
a. earnings.
b. dividends.
c. firm cost of common equity.
d. both a & c.
e. all of the above.

13. Which of the following does not affect earnings per share (EPS) when a merger is concluded?
a. The exchange ratio for the shares of the acquired firm
b. The relative total asset/equity ratios of the firms
c. The premium paid above market value for the acquired firm
d. The relative earnings growth rates of the firms

14. Elimination of all foreign exchange risk:
a. should be the objective of a prudent financial manager.
b. should be analyzed on a cost benefit basis.
c. is possible through diversification.
d. both a and c.
e. all of the above.

15. Consider cash flows for Projects X and Y such as:
Project X Project Y
Year 1 $3000 $ 0
Year 2 $ 0 $3000
A rational person would prefer receiving cash flows sooner because:
a. the money can be reinvested.
b. the money is nice to have around.
c. the investor may be tired of a particular investment.
d. the investor is indifferent to either proposal.

16. Corporations receive money from investors with:
a. initial public offerings.
b. seasoned new issues.
c. primary market transactions.
d. a and b.
e. all of the above.

17. The debt ratio is a measure of a firm's:
a. leverage.
b. profitability.
c. liquidity.
d. efficiency.

18. Capital market instruments include:
a. negotiable certificates of deposit.
b. corporate equities.
c. preferred stock.
d. both b and c.
e. all of the above.

19. What is the most important ingredient in developing a firm's financial plan?
a. A forecast of sales revenues
b. Determining the amount of dividends to pay shareholders
c. Projecting the rate of interest on proposed new debt
d. Deciding upon which method of depreciation a firm should utilize

20. Which of the following best illustrates the hedging principle as it applies to the management of working capital?
a. Don't place all your eggs in one basket.
b. Temporary current assets of the firm should be financed with short-term sources of funds.
c. Permanent current assets of the firm should be financed with short-term sources of funds.
d. All current assets should be financed with short-term sources of funds.

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The solution explains various true/false and multiple choice questions relating to finance

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