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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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Solution Preview

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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