Solution to multiple choice questions in finance

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 risk

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.

Which of the following is not a reason why financial analysts use ratio analysis?

a. Ratios help to pinpoint a firm's strengths.

b. Ratios restate accounting data in relative terms.

c. Ratios are ideal for smoothing out the differences that may exist when comparing firms that use different accounting practices.

d. Some of a firm's weaknesses can be identified through the usage of ratios.

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

Table 1

Smith Company Balance Sheet

Assets:

Cash and marketable securities $300,000

Accounts receivable 2,215,000

Inventories 1,837,500

Prepaid expenses 24,000

Total current assets $3,286,500

Fixed assets 2,700,000

Less: accumulated depreciation 1,087,500

Net fixed assets $1,612,500

Total assets $4,899,000

Liabilities:

Accounts payable $240,000

Notes payable 825,000

Accrued taxes 42,500

Total current liabilities $1,107,000

Long-term debt 975,000

Owner's equity 2,817,000

Total liabilities and owner's equity $4,899,000

Net sales (all credit) $6,375,000

Less: Cost of goods sold 4,312,500

Selling and administrative expense 1,387,500

Depreciation expense 135,000

Interest expense 127,000

Earnings before taxes $412,500

Income taxes 225,000

Net income $187,500

Common stock dividends $97,500

Change in retained earnings $90,000

Based on the information in Table 1, the current ratio is:

a. 2.97.

b. 1.46.

c. 2.11.

d. 2.23.

Based on the information in Table 1, and using a 360-day year, the average collection period is:

a. 71 days.

b. 84 days.

c. 64 days.

d. 125 days.

Based on the information in Table 1, the debt ratio is:

a. 0.70.

b. 0.20.

c. 0.74.

d. 0.42.

Based on the information in Table 1, the net profit margin is:

a. 4.61%.

b. 2.94%.

c. 1.97%.

d. 5.33%.

Based on the information in Table 1, the inventory turnover ratio is:

a. 0.29 times.

b. 2.35 times.

c. 0.43 times.

d. 3.47 times.

The money market is usually thought of as dealing with long-term debt instruments issued by firms with excellent credit ratings. True ___ False ___

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

The key ingredient in a firm's financial planning is the sales forecast.

True ___ False ___

Which of the following is always a non-cash expense?

a. Income taxes

b. Salaries

c. Depreciation

d. None of the above

The future value of an investment increases as the number of years of compounding at a positive rate of interest declines. True ___ False ___

One characteristic of an annuity is that an equal sum of money is deposited or withdrawn each period. True ___ False ___

16. Fixed costs include all of the following EXCEPT:

a. administrative salaries.

b. property taxes.

c. sales commissions.

d. insurance.

Financial leverage means financing some of a firm's assets with:

a. commercial paper.

b. preferred stock.

c. corporate bonds.

d. all of the above.

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.

Disadvantages of using current liabilities as opposed to long-term debt include:

a. greater risk of illiquidity.

b. uncertainty of interest costs.

c. higher cash flow exposure.

d. both a and b.

e. all of the above.

Which of the following types of financing offers the firm the greatest degree of flexibility?

a. Bonds

b. Preferred stock

c. Short-term lines of credit

d. Long-term notes payable