# Multiple choice questions in financial management

1) For a share of stock, the projected selling price one year from now (P1) is $125.00, the projected dividend payment one year from now (Dl) is $4.25, and the investors' required rate of re tu m for the stock is 14%. The estimated selling price of this stock is:

a. $109.65.

b. $120.75.

c. $113.38.

d. none of the above

2) If you were to borrow $10,000 over five years at 12 percent compounded monthly, which is the correct loan payment to be made monthly?

a. $122

b. $222

c. $168

d. $187

3) The principal function of financial statements is to:

a. convey information to managers, investors, and creditors.

b. provide benchmark information for projecting the firm's future performance.

c. inform the firm's shareholders of its likely prospects for growth and cash flows.

d. all of the above

4) Assume that interest rates are expected to be 5 percent in years 1 and 2, 6 percent in year 3, 7 percent in year four, and 7.5 percent in year 5. If you were to make a five-year loan, the appropriate rate of interest to charge under the expectations theory would be:

a. 6.375%.

b. 6.100%.

c. 6.250%.

d. none of the above

5) Because bond prices are sensitive to changes in interest rates:

a. it stands to reason that bonds hardly ever sell in the secondary market at their face value.

b. it is not often that market interest rates and the bond's coupon rates are equal.

c. interest rates in excess of the coupon rate cause the bond to sell at a discount, whereas interest rates below the coupon rate cause the bond to sell at a premium.

d. all of the above

6) A firm using sales as its base has an inventory turn ratio of 4.0 times, a current ratio of 3.1:1, and a quick asset ratio of 2.2:1. The firm has no long-term debt and has a debt ratio of 40 percent. If the firm's assets total $500,000, the firm's sales are:

a. $2,000,000.

b. $180,000.

c. $200,000.

d. $720,000.

7) You are considering an investment that requires an immediate payment of $1 0,000, and a payment one year from now of another $10,000. If you are promised $23,000 in two years, what would be the minimum required rate of return that would make this investment acceptable to you?

a. 12.00%

b. 9.00%

c. 15.00%

d. none of the above

8) A statistic known as a stock's beta coefficient is commonly considered to be:

a. the variation anticipated in a stock's return that accompanies the variation anticipated in the returns of the market.

b. an index of systematic risk.

c. a coefficient of unsystematic risk.

d. none of the above

9) Assume the market's required rate of return for a stock is 15.0 percent, the projected selling price of the stock in one year is $22.00, and the estimated per share dividend in one year is $1.00. The selling price of the stock today is:

a. $21.00.

b. $18.00.

c. $20.00.

d. none of the above

10) A bond is available for purchase that has a face value of $1 0,000, an 8 percent coupon, payable semiannually, and 20 years of its original 25 years left to maturity. How much would you pay for the bond today if the market's required yield is 10 percent?

a. $8,184.60

b. $8,296.88

c. $8,283.64

d. $8,174.36

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#### Solution Preview

1) For a share of stock, the projected selling price one year from now (P1) is $125.00, the projected dividend payment one year from now (Dl) is $4.25, and the investors' required rate of re tu m for the stock is 14%. The estimated selling price of this stock is:

a. $109.65.

b. $120.75.

c. $113.38.

d. none of the above

Answer: c. $113.38.

P1 = D2/ (r-g)

D2 = D1(1+g)

P1 = D2/ (r-g) = D1(1+g) / (r-g)

125 = 4.25 (1+g) / ( 14% -g)

Solving for g

g =10.25 %

P1 = D1 / (r-g) = 4.25 / (14% -10.25%) = 113.38

2) If you were to borrow $10,000 over five years at 12 percent compounded monthly, which is the correct loan payment to be made monthly?

a. $122

b. $222

c. $168

d. $187

Answer: b. $222

interest rate for 1 month = 12%/12 = 1 %

PVIFA (60 periods, 1.% rate=) 44.95504

Therefore monthly payment= 10,000/44.95504 = $222

3) The principal function of financial statements is to:

a. convey information to managers, investors, and creditors.

b. provide benchmark information for projecting the firm's future performance.

c. inform the firm's shareholders of its likely prospects for growth and cash flows.

d. all of the above

Answer: d. all of the above

4) Assume that interest rates are expected to be 5 percent in years 1 and 2, 6 percent in year 3, 7 percent in year four, and 7.5 percent in year ...

#### Solution Summary

Answers Multiple choice questions in financial management dealing with estimated selling price of stock, monthly loan payment, financial statements, appropriate rate of interest to charge under the expectations theory, bond prices, inventory turn ratio, minimum required rate of return, stock's beta coefficient.