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Business Finance Multiple Choice

1) Which of the following best describes the goal of the firm?
A.

The maximization of the total market value of the firm's common stock]
B.

Profit maximization
C.

Risk minimization
D.

None of the above

2) In terms of organizational costs, which of the following sequences is correct, moving from lowest to highest cost?
A.

Corporation, limited partnership, general partnership, sole proprietorship
B.

General partnership, sole proprietorship, limited partnership, corporation
C.

Sole proprietorship, general partnership, limited partnership, corporation
D.

Sole proprietorship, general partnership, corporation, limited partnership

3) Which of the following categories of owners have limited liability?
A.

General partners
B.

Sole proprietors
C.

Shareholders of a corporation
D.

Both a and b

4) __________ is a method of offering securities to a limited number of investors.
A.

Public offering
B.

Initial public offering
C.

Private placement
D.

Syndicated underwriting

5) Which of the following would increase the need for external equity?
A.

A reduction in corporate profits
B.

Inadequate investment opportunities
C.

A slow-down in economic growth
D.

A seasonal reduction in sales revenues

6) Money market instruments include:
A.

bankers' acceptances.
B.

preferred stock.
C.

common stock.
D.

corporate bonds.

7) Difficulty in finding profitable projects is due to:
A.

social responsibility.
B.

competitive markets.
C.

opportunity costs.
D.

ethical dilemmas.

8) According to the agency problem, _________ represent the principals of a corporation.
A.

shareholders
B.

managers
C.

suppliers
D.

employees

9) Which of the following is NOT a principle of basic financial management?
A.

Risk/return tradeoff
B.

Incremental cash flow counts
C.

Profit is king
D.

Efficient capital markets

10) Which of the following financial ratios is the best measure of the operating effectiveness of a firm's management?
A.

Current ratio
B.

Gross profit margin
C.

Return on investment
D.

Quick ratio

11) Marshall Networks, Inc. has a total asset turnover of 2.5% and a net profit margin of 3.5%. The firm has a return on equity of 17.5%. Calculate Marshall's debt ratio.
A.

50%
B.

30%
C.

40%
D.

60%

12) The accounting rate of return on stockholders' investments is measured by:
A.

operating income return on investment.
B.

return on assets.
C.

return on equity.
D.

realized rate of inflation.

13) Suppose that you wish to save for your child's college education by opening up an educational IRA. You plan to deposit $100 per month into the IRA for the next 18 years. Assume that you will be able to earn 10%, compounded monthly, on your investment. How much will you have accumulated at the end of 18 years?
A.

$85,920
B.

$21,600
C.

$33,548
D.

$54,719
E.

$60,056

14) When George Washington was president of the United States in 1797, his salary was $25,000. If you assume an annual rate of inflation of 2.5%, how much would his salary have been in 1997?
A.

$4,085,920
B.

$1,025,000
C.

$2,525,548
D.

$954,719
E.

$3,489,097

15) Northwest Bank pays a quoted annual (nominal) interest rate of 4.75%. However, it pays interest (compouned) daily using a 365-day year. What is the effective annual rate of return (APY)?
A.

3.61%
B.

4.75%
C.

5.02%
D.

4.86%

16) The primary purpose of a cash budget is to:
A.

determine the level of investment in current and fixed assets.
B.

determine the estimated income tax for the year.
C.

provide a detailed plan of future cash flows.
D.

determine accounts payable.

17) 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 projects all liabilities as a fixed percentage of sales.
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 is a much more precise method of financial forecasting than a cash budget would be.

18) All of the following are found in the cash budget EXCEPT:
A.

a net change in cash for the period.
B.

new financing needed.
C.

cash disbursements.
D.

inventory.

19) The break-even model enables the manager of a firm to:
A.

calculate the minimum price of common stock for certain situations.
B.

determine the optimal amount of debt financing to use.
C.

determine the quantity of output that must be sold to cover all operating costs.
D.

set appropriate equilibrium thresholds.

20) A plant can remain operating when sales are depressed:
A.

if the selling price per unit exceeds the variable cost per unit.
B.

unless variable costs are zero when production is zero.
C.

in an effort to cover at least some of the variable cost.
D.

to help the local economy.

21) Which of the following is a non-cash expense?
A.

Packaging costs
B.

Administrative salaries
C.

Interest expense
D.

Depreciation expenses

22) Which of the following is the formula for compound value?
A.

FVn = P/(1+i)n
B.

FVn = P(1+i)-n
C.

FVn = (1+i)/P
D.

FVn = P(1+i)n

23) The present value of a single future sum:
A.

depends upon the number of discount periods.
B.

increases as the discount rate increases.
C.

is generally larger than the future sum.
D.

increases as the number of discount periods increase.

24) If you have $20,000 in an account earning 8% annually, what constant amount could you withdraw each year and have nothing remaining at the end of five years?
A.

$3,408.88
B.

$2,465.78
C.

$5,008.76
D.

$3,525.62

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The solution answers various Business finance multiple choice.

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