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Multiple Choice

1. Which of the following statements best represents what finance is about?
a. How political, social, and economic forces affect corporations
b. Maximizing profits
c. Creation and maintenance of economic wealth
d. Reducing

2. The goal of the firm should be:
a. Maximization of profits.
b. Maximization of shareholder wealth.
c. Maximization of consumer satisfaction.
d. Maximization of sales.

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

4. If you were given the components of current assets and of current liabilities, what ratio(s) could you compute?
a. Quick ratio
b. Average collection period
c. Current ratio
d. Both a and c
e. All of the above

5. 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

6. The percent-of-sales method can be used to forecast:
a. expenses.
b. assets.
c. liabilities.
d. all of the above.

7. 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

8. You wish to borrow $2,000 to be repaid in 12 monthly installments of $189.12. The annual interest rate is:
a. 24%.
b. 8%.
c. 18%.
d. 12%.

9. Green Corp.'s preferred stock is selling for $20.83. If the company pays $2.50 annual dividends, what is the expected rate of return on its stock?
a. 8.33%
b. 12.00%
c. 2.50%
d. 20.00%

10. Sacramento Light & Power issued preferred stock in 1998 that had a par value of $85. The preferred stock pays a dividend of 5.75%. Investors require a rate of return of 6.50% today on this stock. What is the value of the preferred stock today? Round to the nearest $1.
a. $100
b. $85
c. $75
d. $16

11. The NPV method:
a. is consistent with the goal of shareholder wealth maximization.
b. recognizes the time value of money.
c. uses cash flows.
d. all of the above.

12. The NPV assumes cash flows are reinvested at the:
a. IRR.
b. NPV.
c. real rate of return.
d. cost of capital.

13. 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

14. Which of the following is not considered in the calculation of incremental cash flows?
a. Depreciation tax shield
b. Sunk costs
c. Opportunity costs
d. Both a & b

15. 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.

16. The average cost associated with each additional dollar of financing for investment projects is:
a. the incremental return.
b. the marginal cost of capital.
c. risk-free rate.
d. beta.

17. 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.

18. Which of the following would increase the need for external equity?
a. Inadequate investment opportunities
b. A slow-down in economic growth
c. A reduction in corporate profits
d. A seasonal reduction in sales revenues

19. The break-even model enables the manager of the firm to:
a. calculate the minimum price of common stock for certain situations.
b. set appropriate equilibrium thresholds.
c. determine the quantity of output that must be sold to cover all operating costs.
d. determine the optimal amount of debt financing to use.

20. Fixed costs include all of the following EXCEPT:
a. administrative salaries.
b. property taxes.
c. sales commissions.
d. insurance.

21. Financial leverage is distinct from operating leverage since it accounts for the use of:
a. debt.
b. fixed operating costs.
c. preferred stock.
d. both a and c.
e. all of the above.

22. Which two ratios would be most helpful in managing a firm's capital structure?
a. Balance sheet leverage ratios and profitability ratios
b. Leverage ratios and coverage ratios
c. Coverage ratios and liquidity ratios
d. Coverage ratios and profitability ratios

23. The focus of current asset management is on:
a. property, plant, and equipment acquisition.
b. cash, accounts receivable, and inventory levels.
c. investments in marketable securities.
d. both a and c.
e. all of the above.

24. An increase in ___________ would increase net working capital.
a. plant and equipment
b. accounts payable
c. accounts receivable
d. both b and c

25. Which of the following would increase cash flow for a firm?
a. Purchase of marketable securities
b. Purchase of fixed assets
c. Credit sales
d. Cash sales

26. 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.

27. Carrying cost on inventory includes:
a. the required rate of return on investment in total assets.
b. wages of warehouse employees.
c. cost associated with inventory shrinkage.
d. both b and c.
e. all of the above.

28. A firm's credit and collection policies usually include:
a. terms of sale, quality of customers, and collection of credit sales.
b. average collection period, dollar value of aged receivables, and terms of sales.
c. terms of sale and collection of credit sales.
d. terms of sale, level of credit sales, and collection of credit sales.

29. Some complexities of conducting international business include:
a. multiple currencies.
b. differing legal requirements.
c. external control problems.
d. both a and b.
e. all of the above.

30. A spot transaction occurs when one currency is:
a. deposited in a foreign bank.
b. immediately exchanged for another currency.
c. exchanged for another currency at a specified price.
d. traded for another at an agreed-upon future price.

Solution Summary

The solution explains various multiple choice questions in finance

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