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MCQ: Financial Markets, Goals, Ratios, Investments, Budgets, Planning, PV and WACC

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MULTIPLE CHOICE. Choose the one answer for the question.

1. Which of the following is true of an efficient market?
a. 0 There is one seller
b. 0 There is one buyer
c. 0 Stock exchanges are always open
d. 0 There is always a low brokerage fee
e. 0 Information is reflected in security prices immediately

2. Which of the following is a primary financial goal of an organization?
a. 0 Having zero debt
b. 0 Increasing market share at any cost
c. 0 Maximization of shareholder wealth
d. 0 Keeping expenses constant
e. 0 Increasing sale prices each year

3. Which of the following ratios measures an organization's liquidity?
a. 0 Acid test ratio
b. 0 Debt ratio
c. 0 Return on equity
d. 0 Times interest earned
e. 0 Return on assets

4. Which of the following ratios would tell an investor about the profitability of the organization?
a. 0 Acid test ratio
b. 0 Debt ratio
c. 0 Return on equity
d. 0 Times interest earned
e. 0 Current ratio

5. Which of the following is the function of investment bankers?
a. 0 Distributing
b. 0 Making commercial loans
c. 0 Taking deposits
d. 0 Cash flow management
e. 0 Auditing

6. Which of the following is a method by which securities are distributed to final investors?
a. 0 Negotiated purpose
b. 0 Commission or best effort basis
c. 0 Direct sale
d. 0 Competitive bid purchase
e. 0 All of the above

7. Which sector of the economy supplied the largest amount of funds in US financial markets in the second half of the 90's?
a. 0 State governments
b. 0 Corporate business
c. 0 U.S. Government
d. 0 Foreign
e. 0 Household

8. What is a cash budget?
a. 0 Detailed plan of future cash flows
b. 0 A budget that shows only what cash comes in
c. 0 A historical look at cash flows
d. 0 A report that analyzes the cash account
e. 0 A report that analyzes the accounts receivable

9. What is the key ingredient of the organization's planning process?
a. 0 Past performance
b. 0 Union contracts
c. 0 Capital budget
d. 0 Full time equivalent employees
e. 0 Sales forecast

10. If an organization collects 30% of sales within a month and the balance two months after the sale, how much would it collect in March if it sold 60,000 in January and 80,000 in February?
a. 0 20,000
b. 0 64,000
c. 0 140,000
d. 0 66,000
e. 0 52,000

11. If your revenue is $10 million, your variable cost is $6 million, your fixed cost is $3 million, what is your contribution margin?
a. 0 $4 million
b. 0 $1 million
c. 0 $3 million
d. 0 $9 million
e. 0 $7 million

12. What is present value?
a. 0 The money you have now
b. 0 The money you have before paying taxes
c. 0 The money you will get next month
d. 0 The current value of a future sum
e. 0 The future value of a current sum

13. How much will you have at the end of three years if you put away $2500 at the end of each year, and you earn 4% on your money?
a. 0 $7500
b. 0 $8000
c. 0 $7805
d. 0 $7800
e. 0 $7750

14. Which of the following decreases the breakeven point?
a. 0 Increase fixed costs
b. 0 Increase variable costs
c. 0 Lower sales price
d. 0 Increase units sold
e. 0 Decrease fixed costs

15. Which of the following is a shortcoming of the payback period as a capital budgeting criterion?
a. 0 It's easy to calculate
b. 0 It doesn't use free cash flows
c. 0 It ignores the time value of money
d. 0 It uses accounting profits
e. 0 It's easy to understand

16. Net present value is the preferred method to evaluate capital budgeting projects because:
a. 0 It requires detailed long term forecasts of cash flows
b. 0 It is sensitive to the choice of discount rate
c. 0 It ignores the time value of money
d. 0 It is consistent with the goal of shareholder wealth maximization
e. 0 It is difficult to explain

17. Trade credit is a:
a. 0 Permanent source of financing
b. 0 Spontaneous source of financing
c. 0 Temporary source of financing
d. 0 Not a source of financing
e. 0 None of the above

18. The three primary motives for holding cash are:
a. 0 Transactions, speculative, predictive
b. 0 Speculative, precautionary, predictive
c. 0 Transactions, speculative, storing
d. 0 Predictive, storing, speculative
e. 0 Transactions, precautionary, speculative

19. Which one of these determining factors of the size of a firm's accounts receivable is under the control of financial managers?
a. 0 Credit and collection policies
b. 0 Percentage of credit sales to total sales
c. 0 Permanent growth in sales
d. 0 Seasonal growth in sales
e. 0 Nature of the business

20. A project has an initial outflow of $10,000. The project will generate free cash flows of $8,000 per year for two years. The discount rate is 8%. What is this project's net present value (NPV)?
a. 0 $4,250
b. 0 $6,000
c. 0 $4,264
d. 0 $16,000
e. 0 $8,000

21. According to the hedging principle, seasonal increases in inventory should be financed with:
a. 0 Long term loans
b. 0 Short term loans
c. 0 Spontaneous financing
d. 0 Common stock
e. 0 Bonds

22. What happens to the cost of debt for firms with debt as their corporate tax rates increase?
a. 0 kd increases
b. 0 kd decreases
c. 0 kd remains the same
d. 0 kd can either increase or decrease depending on the amount of debt
e. 0 kd can either increase or decrease depending on the percent debt represents of the
entire capital structure

23. What is the Weighted Average Cost of Capital (WACC) for a firm where debt is 40% of the firm, preferred stock is 10% of the firm, common stock is 50% of the firm, after-tax cost of debt is 8%, cost of preferred stock is 12%, and cost of common stock is 18%?
a. 0 12.00%
b. 0 12.38%
c. 0 12.67%
d. 0 13.40%
e. 0 16.33%

24. What is a "good" reason for a firm to go public?
a. 0 Private equity investors get to share new wealth with public investors
b. 0 Founders share, on an equal footing, the good (and bad) fortune of the firm with new
shareholders
c. 0 The firm gains future access to the public capital market (it is easier to go back a
second and/or third time)
d. 0 Everyone involved faces legal liability
e. 0 Private investors lose a degree of control of the organization

25. What was a downside of debt financing cited by current Federal Reserve Bank Chairman Ben Bernanke over 15 years ago?
a. 0 There is a theoretical incentive to choose riskier projects over safe ones
b. 0 Highly leveraged firms which suffer losses can find themselves in financial distress
and possibly bankruptcy
c. 0 The need to meet interest payments may force management to take a very short-run
perspective
d. 0 Firms in financial distress may cut back production and employment, and lose
customers and suppliers
e. 0 All of the above

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See attached file for additional details.

MULTIPLE CHOICE. Choose the one answer for the question.

1.Which of the following is true of an efficient market?
b. 0 There is one seller
c. 0 There is one buyer
d. 0 Stock exchanges are always open
e. 0 There is always a low brokerage fee
f. 0 Information is reflected in security prices immediately
Ans: e 0 Information is reflected in security prices immediately

2. Which of the following is a primary financial goal of an organization?
a. 0 Having zero debt
b. 0 Increasing market share at any cost
c. 0 Maximization of shareholder wealth
d. 0 Keeping expenses constant
e. 0 Increasing sale prices each year
Ans: c0 Maximization of shareholder wealth

3. Which of the following ratios measures an organization's liquidity?
a. 0 Acid test ratio
b. 0 Debt ratio
c. 0 Return on equity
d. 0 Times interest earned
e. 0 Return on assets
Ans: a. Acid test ratio

4. Which of the following ratios would tell an investor about the profitability of the organization?
a. 0 Acid test ratio
b. 0 Debt ratio
c. 0 Return on equity
d. 0 Times interest earned
e. 0 Current ratio
Ans: Return on equity

5. Which of the following is the function of investment bankers?
a. 0 Distributing
b. 0 Making commercial loans
c. 0 Taking deposits
d. 0 Cash flow management
e. 0 Auditing
f. Ans:b. 0 Making commercial loans
g.

6. Which of the following is a method by which securities are distributed to final investors?
a. 0 Negotiated purpose
b. 0 Commission or best effort basis
c. 0 Direct sale
d. 0 Competitive bid purchase
e. 0 All of the above
Ans: All of the above

7. Which sector of the economy supplied the largest amount of funds in US financial markets in the second half of the 90's?
a. 0 State governments
b. 0 Corporate business
c. 0 U.S. Government
d. 0 Foreign
e. 0 Household
Ans 0 Corporate business

8. What is a cash budget?
a. 0 Detailed plan of ...

Solution Summary

This solution shows step-by-step calculations to determine the correct answer in determining goals, ratios, investments, budgets, planning, PV and WACC scenarios.

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Similar Posting

Multiple choice Finance- Stock price, WACC, EBIT, interest rate, dividends, beta, risk

Please I need details on numbers 45- 50 but not so much on 27 -44.

27.
The U.S. Treasury offers to sell you a bond for $613.81. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price?

5.91%
6.71%
7.10%
5.59%
5.00%

28.
Temple Square Inc. reported that its retained earnings for 2005 were $490,000. In its 2006 financial statements, it reported $60,000 of net income, and it ended 2006 with $510,000 of retained earnings. How much were paid as dividends to shareholders during 2006?

$20,000
$25,000
$30,000
$35,000
$40,000

29.
Collins Inc's latest net income was $1 million, and it had 200,000 shares outstanding. The company wants to pay out 40% of its income. What dividend per share should the company declare?

$1.60
$1.70
$1.80
$1.90
$2.00

30. The Federal Reserve sells $50 billion of short-term U.S. Treasury securities to the public, other things held constant, what would be the most likely effect on short-term securities prices and interest rates?

Prices and interest rates will both rise.
Prices will rise and interest rates will decline.
Prices and interest rates will both decline.
Prices will decline and interest rates will rise.
There is no reason to expect a change in either prices or interest rates.

31.
Your uncle would like to limit both his interest rate price risk (the risk that rising rates will cause the value of his bonds to decline) and his default risk, but he would still like to invest in corporate bonds. He is considering the following bonds. Which of these bonds would best meet his criteria?

AAA bonds with 10 years to maturity.
BBB perpetual bonds.
BBB bonds with 10 years to maturity.
AAA bonds with 5 years to maturity.
BBB bonds with 5 years to maturity.

32.
Tom Skinner has $45,000 invested in a stock with a beta of 0.8 and another $55,000 invested in a stock with a beta of 1.4. These are the only two investments in his portfolio. What is his portfolio's beta?

0.93
0.98
1.03
1.08
1.13

33.
A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 7%, and if investors require a(n) 11% rate of return, what is the price of the stock?

$47.50
$49.00
$50.50
$52.00
$53.50

34.
Wagner Inc estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept?

Project A is of average risk and has a return of 9%.
Project B is of below-average risk and has a return of 8.5%.
Project C is of above-average risk and has a return of 11%.
None of the projects should be accepted.
All of the projects should be accepted.

35.
The regular payback method has a number of disadvantages. Which of the following items is NOT a disadvantage of this method?

Lack of an objective, market-determined benchmark for making decisions.
Ignores cash flows beyond the payback period.
Does not directly account for the time value of money.
Does not provide any indication regarding a project's liquidity.
Does not directly account for differences in risk among projects.

36.
The relative risk of a proposed project is best accounted for by

Adjusting the discount rate upward if the project is judged to have above average risk.
Adjusting the discount rate downward if the project is judged to have above average risk.
Reducing the NPV by 10% for risky projects.
Picking a risk factor equal to the average discount rate.
Ignoring it because project risk cannot be measured accurately.

37.
A firm is considering the purchase of an asset whose risk is greater than the firm's current risk, based on all methods for assessing risk. In evaluating this asset, it would be reasonable for the decision maker to

Increase the IRR of the asset to reflect its greater risk.
Increase the NPV of the asset to reflect the greater risk.
Reject the asset, since its acceptance would increase the firm's risk.
Ignore the risk differential if the project would amount to only a small fraction of the firm's total assets.
Increase the cost of capital used to evaluate the project to reflect the project's higher risk.

38.
Brandi Co. has an unlevered beta of 1.10. The firm currently has no debt, but is considering changing its capital structure to be 30% debt and 70% equity. If its corporate tax rate is 40%, what is Brandi's levered beta?

1.2549
1.3829
1.5764
1.6235
1.7458

39.
Ridgefield Enterprises has total assets of $300 million. The company currently has no debt in its capital structure. The company's basic earning power is 15%. The company is contemplating a recapitalization where it will issue debt at 10% and use the proceeds to buy back shares of the company's common stock. If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will remain the same. Which of the following will occur as a result of the recapitalization?

The company's ROA will increase.
The company's ROA will remain unchanged.
The company's basic earning power will decline.
The company's basic earning power will increase.
The company's ROE will increase.

40.
You are analyzing the value of an investment by calculating the present value of its expected cash flows. Which of the following would cause the investment to look better?

The discount rate decreases.
The cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same.
The discount rate increases.
The riskiness of the project's cash flows increases.
The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.

41.
You are considering buying a new, $15,000 car, and you have $2,000 to put toward a down payment. If you can negotiate a nominal annual interest rate of 10% and finance the car over 60 months, what are your monthly car payments?

$216.67
$252.34
$276.21
$285.78
$318.71

42.
Elizabeth has $35,000 in an investment account, but she wants the account to grow to $100,000 in 10 years without making any additional contributions to the account. What effective annual rate of interest does she need to earn on the account to meet her goal?

9.03%
11.07%
10.23%
8.65%
12.32%

43.
If the CEO of a firm were filling out a fitness report on a division manager (i.e., "grading" the manager), which of the following situations would be likely to cause the manager to get a BETTER GRADE? In all cases, assume that other things are held constant.

The division's total assets turnover ratio is below the average for other firms in the industry.
The division's DSO (days' sales outstanding) is 40, whereas the average for competitors is 30.
The division's inventory turnover is 6, whereas the average for competitors is 8.
The division's debt ratio is above the average for other firms in the industry.
The division's basic earning power ratio is above the average of other firms in the industry.

44.
McGwire Company's pension fund projects that most of its employees will take advantage of an early retirement program the company plans to offer in five years. Anticipating the need to fund these pensions, the firm bought zero coupon U.S. Treasury Trust Certificates maturing in five years. When these instruments were originally issued, they were 12% coupon, 30-year U.S. Treasury bonds. The stripped Treasuries are currently priced to yield 10%. Their total maturity value is $6,000,000. What is their total cost (price) to McGwire today?

553,776
$5,142,600
$3,404,561
$4,042,040
$3,725,528

45.
A stock that currently trades for $40 per share is expected to pay a year-end dividend of $2 per share. The dividend is expected to grow at a constant rate over time. The stock has a beta of 1.2, the risk-free rate is 5%, and the market risk premium is 5%. What is the stock's expected price seven years from today?

46.
The capital budgeting director of Sparrow Corporation is evaluating a project that costs $200,000, is expected to last for 10 years and produces after-tax cash flows, including depreciation, of $44,503 per year. If the firm's WACC is 14% and its tax rate is 40%, what is the project's IRR?

47.
Maxvill Motors has annual sales of $15,000. Its variable costs equal 60% of its sales, and its fixed costs equal $1,000. If the company's sales increase 10%, what will be the percentage increase in the company's earnings before interest and taxes (EBIT)?

48.
In 1958 the average tuition for one year at an Ivy League school was $1,800. Thirty years later, in 1988, the average cost was $13,700. What was the growth rate in tuition over the 30-year period?

49.
Cleveland Corporation has 100,000 shares of common stock outstanding, its net income is $750,000, and its P/E is 8. What is the company's stock price?

50.
S. Claus & Co. is planning a zero coupon bond issue that has a par value of $1,000 and matures in 2 years. The bonds will be sold today at a price of $826.45. If the firm's marginal tax rate is 40%, what is the annual after-tax cost of debt to the company on this issue?

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