Finance Test Sample Questions: maximizing sharehold wealth, financial management, debt ratio and more...

I am looking for help in finding the correct answers and an explanation of why one answer was chosen over the other. Many of the questions were not thoroughly explained and I am struggling badly with it.

1) Why is maximizing shareholder wealth a better goal than maximizing profits?
a. Maximizing shareholder wealth places greater emphasis on the short term.
b. Maximizing profits ignores the uncertainty that is related to expected profits.
c. Maximizing shareholder wealth gives superior consideration to the entire portfolio of shareholder investments.
d. Maximizing profits gives too much weight to the tax position of shareholders.

2) Financial management is concerned with which of the following?
a. Creating economic wealth
b. Making investment decisions that optimize economic value
c. Making business decisions that optimize economic wealth
d. Raising capital that is needed for growth
e. All of the above

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

4) Millers Metalworks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The total debt ratio for the firm is 50%. Calculate Millers's return on equity.
a. 17.5%
b. 19.5%
c. 21.5%
d. 23.5%

5) When public corporations decide to raise cash in the capital markets, what type of financing vehicle is most favored?
a. Retained earnings
b. Preferred stock
c. Common stock
d. Corporate bonds

6) If an investor were to sell 100 shares of Microsoft stock to another investor in the securities market, this would be referred to as what type of transaction?
a. A primary market transaction
b. A secondary market transaction
c. A money market transaction
d. A futures market transaction

7) 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

8) Which of the following would not be found in a cash budget?
a. Interest expense
b. Taxes
c. Depreciation
d. All of the above would be found in a cash budget.

9) The present value of a $100 perpetuity discounted at 5% is $1200.
True
False

10) You just purchased a parcel of land for $10,000. If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years?
a. $25,000
b. $31,060
c. $38,720
d. $34,310

11) The break-even model expresses the volume of output as a unit quantity.
True
False

12) Which of the following is NOT an example of variable costs?
a. Packaging
b. Depreciation
c. Direct labor
d. Freight costs on products

13) In general, as the level of sales rises above the break-even point, the degree of operating leverage:
a. increases.
b. decreases.
c. remains constant.
d. none of the above.

Table 1
Average selling price per unit $16.00
Variable cost per unit $11.00
Units sold 200,000
Fixed costs $800,000
Interest expense $ 50,000

14) Based on the data in Table 1, what is the break-even point in units produced and sold?
a. $130,000
b. $140,000
c. $150,000
d. $160,000

15) The IRR is the discount rate that equates the present value of the project's future net cash flows with the project's initial outlay.
True
False

16) 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.

17) Net working capital provides a very useful summary measure of a firm's short-term financing decisions.
True
False

18) Which of the following has the least interest rate risk?
a. A six-month unsecured promissory note from International Harvester
b. An eight-year investment certificate from a federally insured bank
c. A 15-year U.S. Treasury bond
d. An AT&T bond maturing in 2010

19) Dorning Shade Company will use an estimated 50,000 gumbands in its manufacturing process next year. The carrying cost of gumband inventory is $.04 per unit, and the cost of reordering gumbands is $50 per order. What is Dorning Shade's economic ordering quantity for gumbands (round to the nearest 100 gumbands)?
a. 11,200
b. 10,700
c. 9,700
d. 8,100

20) ABC will purchase a machine that will cost $2,575,000. Required modifications will cost $375,000. ABC will need to invest $75,000 for additional inventory. The machine has an IRS approved useful life of 7 years; it is presumed to have no salvage value. ABC plans to depreciate the machine by using the straight-line method. The machine is expected to increase ABC's sales revenues by $1,890,000 per year; operating costs excluding depreciation are estimated at $454,600 per year. Assume that the firm's tax rate is 40%. What is the annual operating cash flow?
a. $922,464
b. $1,126,287
c. $813,563
d. $1,029,811