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Financial Management MCQ, Objective Type Question for Financial Management for CPD Exam
1.
Financial management is concerned with
which of the following?
a.
Creating economic wealth
b.
Making investment decisions that
optimize economic value
c.
Making business decisions that optimize
economic wealth
d.
Raising capital that is needed for
growth
e.
All
of the above
2.
Purchasing a security of a company that
is issuing their stock for the first time publicly would be considered:
a.
a secondary market transaction.
b.
an
initial public offering.
c.
a seasoned new issue.
d.
both a and b.
An IPO is the process companies
take when there are listing on an exchange for the first time.
3.
Which of the following transactions does
not affect the quick ratio?
a.
Land held for investment is sold for
cash.
b. Equipment is purchased and is financed
by a long-term debt issue.
c.
Inventories are sold for cash.
d.
Inventories are sold on a credit basis.
The quick ratio is a test of how much coverage, a firms
current assets gives over its current liabilities. The relationship is
expressed as Current Assets/Current Liabilities. Inventories and cash are part of
current assets. Any changes would affect the ratio.
4.
Smith Corporation has current assets of
$11,400, inventories of $4,000, and a current ratio of 2.6. What is Smith’s
acid-test ratio?
a. 1.69
b. 0.54
c. 0.74
d. 1.35
The acid-test ratio is similar to the quick ratio in many regards.
However, the ratio looks at only the” liquid” assets. Liquidity is a measure of
how quick an asset can be transformed into cash. Quick Ratio = (Current assets
– Inventory)/Current Liabilities. Current liabilities will be given by
$11400/2.6=$4385. the quick ratio will then be (114000 – 4000)/4385 =
5.
Smart and Smiley Incorporated has an
average collection period of 74 days. What is the accounts receivable turnover
ratio for Smart and Smiley? You may use a 360-day year.
a. 4.86
b. 2.47
c. 2.66
d. 1.68
Average debtors collection period = Average debtors/Sales
* 360 = 74. Accounts receivable turnover = average debtors/sales.
6. Organized
security exchanges provide which of the following benefits?
a. A
continuous market
b. Established
and publicized fair security prices
c. Help
businesses raise new capital
d. All of the
above
An example of an organized security exchange is the
7. Which
of the following is NOT a basic function of a budget?
a. Budgets
indicate the need for future financing.
b. Budgets
provide the basis for corrective action when actual figures differ from the
budgeted figures.
c. Budgets compare
historical costs of the firm with its current cost performance.
d. Budgets
allow for performance evaluation.
8. The preparation of a cash budget serves
which of the following purposes?
a. To
estimate the amount and timing of cash flows that are needed in order to
optimize the price of the firm’s common stock
b. To calculate
the amount of future cash flows that would be needed in order to achieve the
optimal level of financing during the forecast period
c. To
determine the amount and timing of short-term financing that would be required
for the operation of a business during the forecast period
d. To
estimate the amount of sales volume that would be required in order to achieve
the break-even point
A cash budget is a financial estimate of future actions. The creation,
of a cash budget, involves the identification of all inflows and outflows. Once
this has been matched, the financing requirements can then be estimated.
Financing requirements show how much a company must borrow in order to continue
its operations.
9. The first step involved in predicting
financing needs is:
a. projecting the
firm’s sales revenues and expenses over the planning period.
b. estimating
the levels of investment in current and fixed assets that are necessary to
support the projected sales.
c. determining
the firm’s financing needs throughout the planning period.
d. none
of the above.
Financing needs are the amount a company must borrow in
order not to be short of cash. To determine financing needed the company must
first evaluate its inflows and outflows for adequacy.
10. What is the present value of $1,000 to be
received 10 years from today? Assume that the investment pays 8.5% and it is
compounded monthly (round to the nearest $1).
a. $893
b. $3,106
c. $429
d. $833
The formula for determining present value, with
compounding is PV = FV/ (1+(r/t)) NT. N= the number of years, T= the
number of compounding periods = 12, and r = 8.5%
11. The future value of $500 deposited into an
account paying 8% annually for three years is:
a. $500.
b. $630.
c. $700.
d. $620.
Future value = Present value * (1 + r) n. N =
3, present value = $500 and r = 8%
12. Tom’s Trashbins, Inc. has fixed costs of
$225,000. Tom’s trashbins sell for $45 and have a unit variable cost of $20.
What is Tom’s break-even point in units?
a. 8,500
b. 8,750
c. 9,000
d. 9,250
Break-even analysis is an evaluation
technique for which the objective is to determine the volume of production
yielding no profits or losses. The break-even point is determined by Fixed
costs/(Selling price – Variable cost).
13. Which of the following statements is
correct?
a. In
general, a firm with low operating leverage has a small proportion of its total
costs in the form of fixed costs.
b. An
increase in the personal tax rate would not affect firms’ capital structure
decisions.
c. A
firm with high business risk is more likely to increase its use of financial
leverage than a firm with low business risk, assuming all else is equal.
d. All
of the above are correct.
e. None of the
above is correct.
14. If fixed interest expense is present in a
firm’s cost structure, so is:
a. financial
leverage.
b. capital
leverage.
c. operating
leverage.
d. net
operating profit after tax.
Financial
leverage is a measure of how a firm is financed. It shows how much debt is
being taken by the company. Interest is the payment to debt instruments.
15. If the IRR is greater than the required rate of return, the:
a. present
value of all the cash inflows will be greater than the initial outlay.
b.
payback will be less than
the life of the investment.
c.
project should be rejected.
d. both a and b.
IRR (internal rate of return) is a
technique that determines the rate, which will equate all cash inflows with
outflows.
16. A quite risky working capital management policy would have a high
ratio of:
a. short-term
debt to bonds and equity.
b. short-term debt
to total debt.
c. bonds
to property, plant, and equipment.
d. short-term
debt to equity.
Working capital is the difference
between current assets and current liabilities. If a company takes on many
short-term debts, its operations may be hindered.
17. Why are domestic cash management systems less complicated than
international cash management systems?
a. Domestic
systems do not have to allow for currency fluctuations.
b. International
cash management systems are not affected by interest rate differences.
c. International
cash management systems actually are less complicated because the rest of the
world’s major countries are more attuned to the advantages of electronic funds
transfer.
d. International
cash management systems actually are less complicated because transactions are
fewer but for larger sums of money.
18. Which of the following would decrease free
cash flows? A decrease in:
a.
depreciation expense.
b.
interest expense.
c. incremental sales.
d.
both a & c.
e.
all of the above.
Free cash flow is the amount of cash
that a company has after it has taken into consideration all operating and
financing costs. If there is a decrease in sales then the total cash collected
by the company would decrease.
19. An increase in ___________ would increase the weighted average
cost of capital.
a. flotation costs
b. projected
dividends
c. the
tax rate
d.
both a and c
e.
all of the above
20. Which of the following best describes a firm’s cost of capital?
a. The
average yield to maturity on debt
b. The
average cost of the firm’s assets
c. The rate of
return that must be earned on its investments in order to satisfy the firm’s
investors
d. The
coupon rate on preferred stock
21. Given the following information for PepsiCo, determine the
company’s weighted average cost of capital.
Value Cost of Capital
Restaurant Division $ 5 Billion 13%
Snack Foods Division 7 Billion 12%
Beverages Division 13 Billion 8%
a. 10.12%
b. 11.00%
c. 12.10%
d. 13.00%
The weighted average cost of capital is
derived after taking into consideration the weightings, for each finance
source. Therefore WACC = 13% (5/25) + 12% (7/25) + 8% (13/25).
22. A
__________ is a business combination of two companies in which the new company
maintains the identity of the acquiring company.
a. consolidation
b. holding
company
c. conglomerate
d. merger
23. Which
of the following is not a potential advantage of a merger in the
a. A
better financing structure
b. A
better use of tax-loss carry-forwards
c. A more secure
monopolization of an industry
d. A
lower operating risk through diversification
24. If one security
has a greater risk than another security, how will investors respond?
a.
They will require a lower rate of return
for the investment that has greater risk.
b.
They would be indifferent regarding
their expectation of rates of return for either investment.
c.
They
will require a higher rate of return for the investment that has greater risk.
d.
None of the above
The tenet, of both the efficient
frontier, in portfolio analysis and the Capital assets pricing model, is that
investors are rational and will only take more risk for more returns.
25. Which of the following is a characteristic
of an efficient market?
a.
Small number of individuals
b.
Opportunities exist for investors to
profit from publicly available information.
c.
Security prices reflect fair value of
the firm.
d.
Immediate
response occurs for new public information.
The efficient market hypothesis assumes
that share prices are reflective of all forms of information. Under the
hypothesis, there are three forms of market efficiency: weak form, semi-strong
form, and strong form.
26. If a company’s average collection period
is higher than the industry average, then the
company might be:
a. enforcing
credit conditions upon its customers which are too stringent.
b. allowing its
customers too much time to pay their bills.
c. too
tough in collecting its accounts.
d. too
liquid.
27. If an investor were to sell 100 shares of Microsoft stock to
another investor in the securities market, this would be referred to as what
type of transaction?
a. A
primary market transaction
b. A secondary
market transaction
c. A
money market transaction
d. A
futures market transaction
The secondary market is the market for “confirmed”
shares. The market is populated by companies that have been listed for a long
time.
28. Which
of the following is NOT a basic function of a budget?
a. Budgets
indicate the need for future financing.
b. Budgets
provide the basis for corrective action when actual figures differ from the
budgeted figures.
c. Budgets compare
historical costs of the firm with its current cost performance.
d. Budgets
allow for performance evaluation.
A budget is a quantitative assessment of future actions. The
difference, between the inflows and outflows shows the amount of funding
required. A budget can also be used for performance evaluation.
29. Break-even analysis can be useful in:
a. capital
expenditure analysis.
b. bond
refunding decisions.
c. rights
offering decisions.
d. all of the
above.
Break-even analysis, as
described above, is the technique used to determine a no profit or loss
position.
30. What
is the value today of an investment that pays $500 every year at year-end
during the next 15 years if the annual interest rate is 9%?
a. $4,030.50
b. $7,500.00
c. $3,500.00
d. $7,000.00
A constant uniform payment, over a period, is an annuity.
The present value, of an annuity is given by
31. The NPV assumes cash flows are reinvested at the:
a.
IRR
b.
NPV
c.
real rate of return
d. cost of capital
32. With regard to the hedging principle, which of the following
assets should be financed with current liabilities?
a. Minimum
level of cash required for year-round operations
b. Expansion
of accounts receivable to meet seasonal demands
c. Machinery
used to produce a firm’s inventory
d. Both a and b
e. Both
b and c
The hedging principle is a matching
technique, which matches the cashflows for an asset with the costs of acquiring
the asset. Current liabilities are debt that mature within a year.
33. With respect to working capital policy, firms most often employ:
a. a
cautious approach which finances short-term assets with long-term financing.
b. the
hedging principle.
c. an
aggressive approach which finances long-term assets with short-term financing.
d. a mixture of
all of the above.
34. Under a field warehouse financing agreement:
a. collateral
inventories are physically separated from other inventories of the borrower.
b. collateral
inventories are placed under the control of a third party.
c. a
warehouse receipt is issued which might or might not be negotiable.
d. all of the
above.
35. The Omega Corp. plans to borrow $10,000 for a 60-day period. At
maturity, Omega will repay the $10,000 principal plus interest at an annual
rate of 12%. What is the effective rate of interest on this loan?
a. 12.62%
b. 12.13%
c. 11.47%
d. 11.22%
The effective interest is determined by (1 + (12%/12))
12 – 1 = 12.68%
36. All else equal, which of the following is the most likely to
occur if actual sales are much less than forecasted sales?
a. The
company will be in a better position to pay down most of its debt.
b. The
firm’s actual investment in inventory will be unchanged from the amount
forecasted.
c. Accounts
receivable will rise significantly above the forecast.
d. The company
might face a cash flow crunch.
37. Given that short-term interest rates typically fluctuate more
than long-term rates, interest rate risk is least for:
a. Treasury bills
b. common
stock.
c. long-term
government bonds.
d. medium-term
corporate bonds.
38. Money market funds:
a. are
one of the oldest forms of mutual funds.
b. typically
invest in a diversified portfolio of short-term, high-grade debt instruments.
c. are
generally very profitable but fail to provide liquidity to the small investor.
d. typically
sell shares to the public in $5,000 denominations.
39. Which of the following has the least interest rate risk?
a. A
six-month unsecured promissory note from International Harvester
b. An
eight-year investment certificate from a federally insured bank
c. A 15-year U.S.
Treasury bond
d. An
AT&T bond maturing in 2010
Interest rate risk is the possibility that rates will
change.
40. Which of the following generally have maturities of one year or
less?
a. Treasury bills
b. Money market mutual fund
c. Commercial paper
d. Both
a and c
e. All of the above
Treasury bills are instruments issued
by the government and last for 3 – 6 months. A Commercial paper is an
instrument issued by reputable companies that usually lasts less than a year.
41. Which of the following is a category of inventory?
a. Raw
materials
b. Work-in-progress
c. Finished
goods
d. All of the
above
42. Which of the following influences the amount of investment a firm
will have tied up in accounts receivable?
a. Terms
of sale
b. Volume
of credit sales
c. Collection
efforts
d. Credit-worthiness
of customers
e. All of the
above
Accounts receivables are the debtors of a firm.
43. Which of the following cash flows are not considered in the
calculation of the initial outlay for a capital investment proposal?
a. Training
expense
b. Working
capital investments
c. Installation
costs of an asset
d. Before-tax
selling price of old machine
44. XYZ, Inc. is considering
adding a product line that would utilize unused floor place of their
manufacturing plant. The floor space would be considered a(n):
a. variable cost.
b. opportunity cost.
c. sunk cost.
d. irrelevant cash flow.
A sunk cost is an expense,
on an item, place, machine etc, that has been incurred and no further benefits
are expected.
45. What is the capital budgeting term that is used to refer to more
than one investment alternative that performs the same function?
a. Simulated
b. Capital
rationed
c. Mutually
exclusive
d. Opportunistic
46. Which of the following best describes why cash flows are utilized
rather than accounting profits when evaluating capital projects?
a. Cash
flows have a greater present value than accounting profits.
b. Cash flows
reflect the timing of benefits and costs more accurately than accounting
profits.
c. Cash
flows are more stable than accounting profits.
d. Cash
flows improve the tax position of a firm more than accounting profits.
e. None
of the above
47. The most expensive source of capital is:
a. preferred
stock.
b. new common
stock.
c. debt.
d. retained
earnings.
48. A company has a capital structure that consists of 50% debt and
50% equity. Which of the following is true?
a. The
weighted average cost of capital is less than the cost of equity financing.
b. The
cost of equity financing is greater than the cost of debt financing.
c. The
weighted average cost of capital is calculated on a before-tax basis.
d. Both
a and b.
c.
All of the above.
49. Typically, Delta, Inc. maintains $1 million in cash and
marketable securities. The firm currently is expecting an economic recession
and projects that its net cash flows from operations during the period will be
$2.5 million. Delta expects annual interest and sinking fund payments will be
$3 million during the period. If the recession occurs, Delta’s cash balance at
the end of the period will be:
a. $6.5
million.
b. $1
million.
c. $500,000.
d. $3.5
million.
A sinking fund is a fund setup in order
to liquidate a liability. The company already has $3.5million and has to make
payments of $3million.
50. Which of the following is not a component of a firm’s capital
structure?
a. Preferred
stock
b. Bonds
c. Common
stock
d. Accounts
payable
e. Retained
earnings
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