Multiple Choice

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Sample Finance Quiz

1. The ______ is the annual rate of interest earned on a security purchased on a given date and held to maturity.
A. Term Structure
B. Yield Curve
C. Risk-free Rate
D. Yield to maturity
2. If a new asset is being considered as a replacement for an old asset, the relevant cash flows would be found by adding the expected cash flows attributed to old asset and the expected cash flows for new asset.
A. True
B. False
3. A firm with limited dollars available for capital expenditures is subject to
A. Capital Dependency
B. Working Capital Constraints
C. Capital Rationing
D. Mutually Exclusive Projects
4. The credit applicants ________ is its ability to repay the requested credit.
A. Collateral
B. Capacity
C. Character
D. Capital
5. When managing accounts receivable, a good strategy to employ without losing future sales is to
A. Tighten the terms
B. Offer cash discounts
C. Send the accounts to a collection agency
D. Make frequent personal visits to the customer
6. The ______ rate of interest is typically the rate of return on a three-month U.S. Treasury bill.
A. Premium
B. Nominal
C. Real
D. Tax treatment risk
7. The risk premium consists of a number of components, including all of the following EXCEPT
A. Liquidity Risk
B. Default Risk
C. Inflationary Risk
D. Tax Treatment Risk
8. The _______ is the amount of time it takes the firm to recover its initial investment
A. Average rate of return
B. Internal rate of return
C. Payback period
D. Net present Value
9. The legal contract setting forth the terms and provisions of a corporate bond is a(n)
A. Promissory note
B. Indenture
C. Loan Document
D. Debenture
10. As an outstanding bond approaches maturity, the price of the bond will always trend toward par value until, at maturity, the bond is worth its face value.
A. True
B. False
11. The ______ is the discount rate that equates the present value of the cash inflows with the initial investment.
A. Average rate of return
B. Internal rate of return
C. Cost of capital
D. Payback period
12. If the required return is less than the coupon rate, a bond will sell at
A. A discount
B. Par
C. Book Value
D. A premium
13. Sunk costs are cash outlays that have already been made and therefore have no effect on the cash flows relevant to the current decision. As a result, sunk costs should not be included in a projects incremental cash flows.
A. False
B. True
14. ______ yield curve reflects higher expected future rates of interest.
A. An upward-sloping
B. A flat
C. A linear
D. A downward-sloping
15. If a firm is subject to capital rationing, it is able to accept all independent projects that provide an acceptable return.
A. False
B. True
16. Bonds are
A. Long-term debt investments
B. A form of equity financing that pays interest.
C. A series of short-term debt instruments.
D. A hybrid form of financing used to raise large sums of money from a diverse group of lenders.
17. _______ is the process of evaluating and selecting long-term investments consistent with the firm's goal of owner wealth maximization.
A. Capital budgeting
B. Recapitalizing assets
C. Restructuring debt
D. Ratio Analysis
18. Mutually exclusive projects are those whose cash flows compete with one another; the acceptance of one does not eliminate the others from further consideration.
A. True
B. False
19. As credit standards are relaxed, sales are expected to ________ and the investment in accounts receivable is expected to _______.
A. Increase; Increase
B. Increase; Decrease
C. Decrease; Decrease
D. Decrease; Increase
20. The aggressive financing strategy is _______ method while the conservative financing strategy is _______ method.
A. A high-profit, high-risk; a low profit, low-risk
B. A low-profit, low-risk; a high-profit, high-risk
C. A low-profit, high-risk; a high-profit, low-risk
D. A high-profit, low-risk; a low-profit, high-risk
21. The _______ feature permits the issuer to repurchase bonds at a stated price prior to maturity.
A. Capitalization
B. Conversion
C. Call
D. Put
22. The ABC Company has two bonds outstanding that are the same except for the maturity date. Bond D matures in 4 years, while Bond E matures in 7 years. If the required return changes by 15 percent
A. Bond E will have a greater change in price.
B. The price change for the bonds will be equal.
C. The price of the bonds will be constant.
D. Bond D will have a greater change in price.
23. If the payback period is less than the maximum acceptable payback period, we would accept a project.
A. True
B. False
24. One way to improve the cash conversion cycle is to
A. Borrow funds.
B. Slow down credit approvals.
C. Speed up collections.
D. Reduce inventory turnover.
25. Certain financing plans are termed conservative when
A. Short-term financing is used frequently.
B. Risk is increased.
C. Working capital is relatively high.
D. Working capital is relatively low.
26. The _______ is an inventory management technique that minimizes inventory investment by having materials inputs arrive at exactly the time they are needed for production.
A. ABC system
B. MRP system
C. JIT system
D. EOQ model
27. An aging schedule breaks down accounts receivable into groups on the basis of the first letter of the name of the company that owes on the account.
A. False
B. True
28. In the EOQ model, if carrying costs increase while all other costs remain unchanged, the number of orders placed would be expected to
A. Remain unchanged
B. Decrease
C. Change without regard to carrying costs
D. Increase
29. 2/15 net 45 translates as
A. 15 percent cash discount if paid in 2 days, net 45-day credit period.
B. 45 percent of account due in 15 days, payment prior to day 15 receives a 2 percent discount.
C. 2 percent cash discount if paid prior to 15 days, if customer does not take a cash discount, the balance is due in 45 days.
D. 2 percent of the balance is due in 15 days, the remaining balance is due in 45 days.
30. A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years. The payback period of the project is approximately:
a. 1.5 years
b. 2 years
c. 3.3 years
d. 4 years

31. What is the approximate yield to maturity for a $1000 par value bond selling for $1,120 that matures in 6 years and pays 12 percent interest annually?
a. 9.4 percent
b. 8.5 percent
c. 13.2 percent
d. 12.0 percent

32. A firm has an average age of inventory of 20 days, an average collection period of 30 days, and an average payment period of 60 days. The firm's cash conversion cycle is _____ days.
a. 70
b. 50
c. -10
d. 110