# 35 Finance Multiple Choice Problems

1. Financial leverage is beneficial only if the firm can employ the borrowed funds to earn a higher rate of return than the interest rate on the borrowed amount. Generally speaking, the higher the financial leverage, the greater the profits at high levels of operating profit.

a) true

b) false

2. How long must one wait (to the nearest year) for an initial investment of $1,000 to triple in value if the investment earns 8% compounded annually?

a) 9

b) 14

c) 22

d) 25

3. How much can be accumulated for retirement if $2,000 is deposited annually, beginning one year from today, and the account earns 9% interest compounded annually for 40 years (rounded up to the nearest 100th dollar)?

a) $87,200

b) $320,950

c) $675,800

d) $802,350

4. What is the YTM of a 7.5 % annual coupon bond, with a $1,000 face value, which matures in 4 years? The market price of the bond is $1,108.32.

a) 4.48%

b) 5.23%

c) 5.76%

d) 6.99%

5. You just bought new furniture for $5,000. The payment is due in 3 years, same as cash. If you can earn 8% on your money, how much money should you set aside today in order to make the payment when due in three years (rounded to the nearest dollar)?

a) $3,969

b) $4,287

c) $4,624

d) $6,299

6. How long must one wait (to the nearest year) for an initial investment of $1,000 to equal $4,500 in value if the investment earns 12% compounded annually?

a) 4 years

b) 6 years

c) 9 years

d) 13 years

7. The present value of cash flows minus initial investments is known as the net present value.

a) true

b) false

8. The expected rate of return given up by investing in a project is known as:

a) break-even point

b) operating leverage

c) internal rate of return

d) opportunity cost of capital

9. Suppose we can invest $4,000 today and receive $6,200 in 4 years. What is the Net Present Value given a 10% expected return?

a) $4,235

b) $4,000

c) $235

d) $2,200

10. The payback rule considers all cash flows that arrive after the payback period.

a) true

b) false

11. The discount rate at which NPV = 0 is known as:

a) degree of operating leverage

b) internal rate of return

c) forward premium

d) Purchasing Power Parity (PPP)

12. The (A) ____________ is the ratio of present value to initial investment, and provides the highest net present value per dollar of investment.

a) forward contract

b) perpetuity

c) plowback ratio

d) profitability index

13. Hard rationing involves limits on available funds imposed by management.

a) true

b) false

14. When performing cash flow analysis, you should discount actual cash flows, not accounting income. Using accounting income, rather than cash flow, could lead to erroneous decisions.

a) true

b) false

15. A stock or bond's real rate of return factors in:

a) inflation

b) the market premium

c) compound interest

d) the cost of capital

16. The place where the sale of new stock first occurs is known as the:

a) initial public offering

b) over the counter market

c) primary market

d) discount market

17. The movement of stock prices from day to day reflects an upward pattern. Statistically speaking, the movement of stock prices reflect a gradual increase.

a) true

b) false

18. Leverage is using ___________ to magnify the potential return to a firm.

a) profit

b) equity

c) fixed costs

d) interest

19. By decreasing leverage, the firm increases its profit potential, but also increases its risk of failure.

a) true

b) false

Assume the following data for the next three (3) questions:

Company A Fixed Costs = $100,000

Company A Variable Costs per unit = $0.50

Company A price per unit = $3.00

Company B Fixed Costs = $50,000

Company B depreciation = 10 percent

Company B Contribution Margin = $1.50

20. The break-even point for Company A is:

a) 20,000 units

b) 28,571.43 units

c) 33,333.33 units

d) 40,000 units

21. The break-even point for Company B is:

a) 20,000 units

b) 30,000 units

c) 33,333.33 units

d) 40,000 units

22. As compared to Company A, Company B utilizes low operating leverage. This will work against them when sales are low, but will work in their favor when sales are high.

a) true

b) false

23. Generally, if the projected return of a potential project is higher than a firm's current Weighted Average Cost of Capital (WACC), then the firm should ACCEPT the project. Conversely, they should REJECT the project if the potential return is lower than the expected rate of return on a portfolio of all the firm's current securities (WACC).

a) true

b) false

24. Other things equal, stock securities are worth more when they are "with-dividend". Thus when the stock "goes ex," we would expect the stock price to drop by the amount of the dividend.

a) true

b) false

25. More often than not, the announcement of a stock split results in a rise in the market value of the firm. This is due to the increase in the company's long and short-term assets.

a) true

b) false

26. You've just been informed that you stand to inherit $60,000 in 10 years. You can't wait that long, and would like to receive the money now. At an interest rate of 8%, how much would you receive?

a) $43,200

b) $18,677

c) $35,481

d) $27,792

27. You have $30,400 to invest, and would like to receive $40,000 in 5 years. What interest rate do you need to accomplish this?

a) 8.23%

b) 6.87%

c) 5.64%

d) 10.56%

28. "The cost of the asset is allocated equally over the periods of an asset's estimated useful life" describes the concept of:

a) leverage

b) Net Present Value

c) straight-line depreciation

d) divided perpetuities

29. If a stock dividend pays out $4.82, there is a 6.5% growth rate, and the discount rate is 12%, the selling price of the stock will be:

a) $87.64

b) $92.26

c) $97.13

d) $101.57

30. Gains and losses resulting from the sale of securities in an arm's-length transaction are said to be:

a) liquid

b) intangible

c) with-dividend

d) realized

31. Long-run planning includes production process prioritizing and operational budgeting or profit planning.

a) true

b) false

32. A schedule of all production spending expected to occur during the budget period is known as the selling and administrative expense budget.

a) true

b) false

33. If your firm is in a mature industry with few, if any, positive NPV projects available, acquisition may be the best use of your funds.

a) true

b) false

34. If a firm uses the _________ as an investment criterion, one of the risks it takes is that it may ignore some future cash flows.

a) AAR

b) payback rule

c) IRR

d) NPV

35. Costs that have accrued in the past, which should not be included in your decision to abandon or remain with a strategy, are referred to as:

a) variable costs

b) opportunity costs

c) sunk costs

d) financing costs

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#### Solution Preview

1. Financial leverage is beneficial only if the firm can employ the borrowed funds to earn a higher rate of return than the interest rate on the borrowed amount. Generally speaking, the higher the financial leverage, the greater the profits at high levels of operating profit.

a) true

b) false

b) false

2. How long must one wait (to the nearest year) for an initial investment of $1,000 to triple in value if the investment earns 8% compounded annually?

a) 9

b) 14

c) 22

d) 25

3000=1000*(1+.08)^n

b) 14

3. How much can be accumulated for retirement if $2,000 is deposited annually, beginning one year from today, and the account earns 9% interest compounded annually for 40 years (rounded up to the nearest 100th dollar)?

a) $87,200

b) $320,950

c) $675,800

d) $802,350

Here we have to find out the compounded value of annuity

F=A*((1+r)^n-1)/r

F=Future value, A= Annuity r= rate of interest n=duration

=$675,764.89

4. What is the YTM of a 7.5 % annual coupon bond, with a $1,000 face value, which matures in 4 years? The market price of the bond is $1,108.32.

a) 4.48%

b) 5.23%

c) 5.76%

d) 6.99%

a) 4.48%

5. You just bought new furniture for $5,000. The payment is due in 3 years, same as cash. If you can earn 8% on your money, how much money should you set aside today in order to make the payment when due in three years (rounded to the nearest dollar)?

a) $3,969

b) $4,287

c) $4,624

d) $6,299

The money= 5000/(1.08)^3=$3969

a)$3,969

6. How long must one wait (to the nearest year) for an initial investment of $1,000 to equal $4,500 in value if the investment earns 12% compounded annually?

a) 4 years

b) 6 years

c) 9 years

d) 13 years

4500=1000*(1+.12)^n

n=13

7. The present value of cash flows minus initial investments is known as the net present value.

a) true

b) false

a) true

8. The expected rate of return given up by investing in a ...

#### Solution Summary

This Solution contains calculations and the answer to each question.

Multiple Choice And Short Answer

Please see attached sheet for problems and instructions. Do not take if not willing to follow instructions.

For the multiple choice/true false answers only submit the question number and answer -- do not include the question in your answer sheet. For other questions/problems, please show all of your work. One Excel attachment is preferred.

TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false.

1. The required rate of return reflects the costs of funds needed to finance a

project.

.

2. The weighted average cost of capital is computed using before-tax costs of

each of the sources of financing that a firm uses to finance a project.

2) _______

3. Tax credits that cannot be used by one firm can take on value if the firm is

acquired by another firm.

4. For the risk-averse financial manager, the more risky a given course of

action, the higher the expected return must be.

.

5. Economic exposure refers to the overall impact of exchange rate changes on

the value of the firm.

6. Tax credits that cannot be used by one firm can take on value if the firm is

acquired by another firm.

.

7. The cash budget can be used as an accurate standard for control purposes

by adjusting the cost figures for planned sales in proportion to total assets

8. Carrying inventory reduces the costs associated with periodic bad debt

losses.

.

9. A conflict can occur when using NPV and IRR to evaluate a project because

the IRR assumes reinvestment at the IRR rate while the NPV assumes

reinvestment at the cost of capital.

10. Corporate debt markets clearly dominate the corporate equity markets when

new funds are being raised.

.MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

11. A project costs $10,000 and is expected to return after-tax cash flows of

$3,000 each year for the next 10 years. This project's payback period is:

a. three years.

b. three and one-third years.

c. four years.

d. 10 years

12. Which of the following financial ratios is the best measure of how effectively

a firm's management is serving its stockholders?

a. Current ratio

b. Debt ratio

c. ACP

d. Return on equity

13. The rate that a subsidiary or parent of the multinational corporation charges

other divisions of the firm for its products is called a(n):

a. forward price.

b. transaction price.

c. transfer price.

d. exchange price.

14. __________ is a method of offering securities to a limited number of

investors.

a. Initial public offering

b. Private placement

c. Public offering

d. Syndicated underwriting

.

15. Fixed costs include all of the following EXCEPT:

a. administrative salaries.

b. property taxes.

c. sales commissions.

d. Insurance

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. Please provide any back-up of your calculations on a separate sheet of paper so that partial credit can be assigned. You may provide either a Word document or an Excel spreadsheet.

16. A company collects 60% of its sales during the month of the sale, 30% one

month after the sale, and 10% two months after the sale. The company

expects sales of $10,000 in August, $20,000 in September, $30,000 in

October, and $40,000 in November. How much money is expected to be

collected in October?

a. $25,000

b. $15,000

c. $35,000

d. None of the above

17. National Geographic is replacing an old printing press with a new

one. The old press is being sold for $350,000 and it has a net

book value of $75,000. Assume that National Geographic is in the

40% income tax bracket. How much will National Geographic pay in

income taxes from the sale?

a. $140,000

b. $45,000

c. $110,000

d. $87,010

18. Three years from now, Barbara Waters will purchase a laptop computer that

will cost $2,250. Assume that Barbara can earn 6.25% (compounded

monthly) on her money. How much should she set aside today for the

purchase? Round off to the nearest $1.

a. $1,250

b. $900

c. $1,866

d. $3,775

19. How much would an investor be willing to pay today for an investment that

returns $1,000 every year at year-end for five years if he wants to earn a

10% annual return on the investment?

a. $1,000

b. $3,791

c. $5,000

d. $7,700

20. Kannan Carpets, Inc. has asked you to calculate the company's current

ratio for 2001. All you have is a partial balance sheet and some

assumptions. Using the information provided, calculate Kannan's quick ratio

for 2001.

Gross profit margin = 50%

Inventory turnover (COGS/Inv) = 5

2001 sales = $3,000

Assets Liabilities & Equity

Cash ? Accounts payable $50

AR $40 Accruals ?

Inventory ? Long-term debt $400

Net fixed assets $500 Equity $250

Total assets $900 Total liab. & equity ?

a. 0.2

b. 0.4

c. 0.6

d. 0.8

21. If Challenge Corporation has sales of $2 million per year (all credit) and an

average collection period of 35 days, what is its average amount of

accounts receivable (assume a 360-day year)?

a. $194,444

b. $ 57,143

c. $ 5,556

d. $ 97,222

22. The cost of capital for a firm which uses 45% debt at an after-tax cost of 10%

and 55% common stock at a 15% cost is:

a. 12.25%.

b. 12.50%.

c. 12.75%.

d. 13.00%.

e. 13.25%.

John R. Scherzi Page 4 6/22/2009

PROBLEMS. Write your answer in the space provided and provide back-up of your work on a separate sheet of paper so that partial credit can be assigned. You may provide either a Word document or an Excel

spreadsheet. Each problem is worth

23. As the financial manager for a manufacturing firm, you have constructed

the following partial pro forma income statement for the next fiscal year.

Sales $11,200,000

Variable costs 5,600,000

Revenue before fixed costs 5,600,000

Fixed costs 2,400,000

EBIT 3,200,000

Interest expenses 1,600,000

Earnings before taxes 1,600,000

Taxes (40%) 640,000

Net income $ 960,000

a. What is the degree of operating leverage at this level of output?

b. What is the degree of financial leverage?

c. What is the degree of combined leverage?

d. What is the break-even point in sales dollars for the firm?

e. If the average variable unit cost is $8, what is the break-even point in

units?

24. TABLE 1

Financial Data for Dooley Sportswear December 31, 1996

Inventory $206,250

Long-Term Debt $300,000

Interest Expense $ 5,000

Accumulated Depreciation $442,500

Cash $180,000

Net Sales $1,500,000

Common Stock $800,000

Accounts Receivable $225,000

Operating Expenses $525,000

Notes Payable - Current $187,500

Cost of Goods Sold $937,500

Plant and Equipment $1,312,500

Accounts payable $168,750

Marketable Securities - current $95,000

Prepaid Insurance $80,000

Accrued Wages $65,000

Federal income Taxes $5,750

From the information presented in Table 5, calculate the following financial ratios for the Dooley Sportswear Company. Assume a 360 day year.

a. current ratio d. operating profit margin

b. Inventory Turns e. net profit margin

c. average collection period

:

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