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    Multiple Choice

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    1. 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

    2. The goal of the firm should be:
    a. Maximization of profits.
    b. Maximization of shareholder wealth.
    c. Maximization of consumer satisfaction.
    d. Maximization of sales.

    3. A firm's business risk is influenced by the:
    a. competitive position of the firm within the industry.
    b. demand characteristics of the firm's products.
    c. financing structure of the firm.
    d. both a and b.
    e. all of the above.

    4. The break-even model enables the manager of the firm to:
    a. calculate the minimum price of common stock for certain situations.
    b. set appropriate equilibrium thresholds.
    c. determine the quantity of output that must be sold to cover all operating costs.
    d. determine the optimal amount of debt financing to use.

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

    6. Money market instruments include:
    a. bankers' acceptances.
    b. preferred stock.
    c. corporate bonds.
    d. common stock.

    7. Capital market instruments include:
    a. negotiable certificates of deposit.
    b. corporate equities.
    c. preferred stock.
    d. both b and c.
    e. all of the above.

    8. Which of the following would increase the need for external equity?
    a. Inadequate investment opportunities
    b. A slow-down in economic growth
    c. A reduction in corporate profits
    d. A seasonal reduction in sales revenues

    9. 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

    10. Benefits of an organized security exchange include:
    a. helping companies raise new capital.
    b. establishing and publicizing fair security prices.
    c. providing a continuous market.
    d. all of the above.

    11. Which of the following statements is true?
    a. Current assets consist of cash, accounts receivable, inventory, and net plant, property, and
    b. The quick ratio is a more restrictive measure of a firm's liquidity than the current ratio.
    c. For the average firm, inventory is considered to be more "liquid" than accounts receivable.
    d. A successful firm's current liabilities should always be greater than its current assets.

    12. Given an accounts receivable turnover of 8 and annual credit sales of $362,000, the average
    collection period (360-day year) is:
    a. 90 days.
    b. 45 days.
    c. 75 days.
    d. 60 days.

    13. At 8% compounded annually, how long will it take $750 to double?
    a. 6.5 years
    b. 48 months
    c. 9 years
    d. 12 years

    14. Determining how low inventory should be depleted before it is reordered is called the:
    a. order point problem.
    b. economic order quality.
    c. stockout minimization issue.
    d. ordering cost dilemma.

    15. A financial lease typically has:
    a. a term that is more than 75% of the useful life of the equipment.
    b. the income tax advantage that the entire lease payment is a deductible expense.
    c. high-tech equipment that might become obsolete rapidly.
    d. a termination clause.

    16. Which of the following is not an advantage of leasing for the lessee?
    a. The lessor must bear the risk that the equipment will be obsolete even before it is returned at the end of the lease.
    b. A lease usually has no restrictive financial covenants on the lessee; the primary duty is to make the lease payments on time.
    c. The lessee must dispose of the equipment at the end of the lease.
    d. An operating lease can lead to an income tax deduction of the entire lease payment.

    17. The disadvantages of debt include all but which of the following?
    a. Inflation will make the debt payments higher.
    b. Indenture agreements can put restrictions on the borrower.
    c. Too much debt might hurt the firm's stock price.
    d. Principal and interest payments must be met.

    18. In order to send your oldest child to law school when the time comes, you want to accumulate $40,000 at the end of 18 years. Assuming that your savings account will pay 6% compounded annually, how much would you have to deposit if you want to deposit one large lump sum today?
    a) $14,013.75
    b) $9559.35
    c) $13,013.75
    d) none of the above

    19. An investment will pay $500 in three years, $700 in five years, and $1,000 in nine years. If the
    opportunity rate is 6%, what is the present value of this investment?
    a) $3221.74
    b) $1501.29
    c) $1534.90
    d) $11086.85

    20. You are planning to deposit $10,000 today into a bank account. Five years from today you expect to
    withdraw $7,500. If the account pays 5% interest per year, how much will remain in the account eight
    years from today?
    a) $250.53
    b) $7005.86
    c) $6091.08
    d) $5202.44

    As the financial manager for a manufacturing firm, you have constructed the following partial pro forma income statement for the next fiscal year.
    Sales $11,200,000
    Variable costs 5,600,000
    Revenue before fixed costs 5,600,000
    Fixed costs 2,400,000
    EBIT 3,200,000
    Interest expenses 1,600,000
    Earnings before taxes 1,600,000
    Taxes (40%) 640,000
    Net income $ 960,000

    Using the information from the partial pro forma income statement above answer questions 21-25

    21. What is the degree of operating leverage at this level of output?
    a) 3.5
    b) 1.25
    c) 2
    d) 1.75

    22) What is the degree of financial leverage?
    a) 2
    b) 1.75
    c) 3.5
    d) 1

    23. What is the degree of combined leverage?
    a. 3
    b. 3.5
    c. 4
    d. 5

    24. What is the break-even point in sales dollars for the firm?
    a) $2,400,000
    b) $4,200,000
    c) $3,500,000
    d) $4,800,000

    25. If the average unit cost is $8, what is the break-even point in
    a) 500,000 units
    b) 600,000 units
    c) 650,000 units
    d) 450,000 units

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    Solution Summary

    The solution explains various multiple choice questions relating to finance