25 Finance Multiple Choice Questions

Question 1The ________ method of developing a pro forma income statement forecasts sales and values for the cost of goods sold, operating expenses, and interest expense that are expressed as a ratio of projected sales.Answer percent of salesaccrualjudgmentalcash.5 pointsQuestion 2The ability of a firm to meet its short-term debt obligations as they come due is indicated by which of the following ratios:Answer liquidity ratiosasset utilization ratiosfinancial leverage ratiosprofitability ratios.5 pointsQuestion 3The degree of operating leverage (DOL) can be measured by the percent change in operating income (EBIT) divided by percent change in:Answer fixed costsvariable costsunit salestotal costs.5 pointsQuestion 4If a firm’s fixed financial costs decrease, the firm’s operating breakeven point willAnswer decreaseincreaseremain unchangedchange in an undetermined direction.5 pointsQuestion 5Ratios used to compare different firms at the same point in time belong to a category of analysis called:Answer time series analysiscross-sectional analysisindustry comparative analysisjust-in-time analysis.5 pointsQuestion 6Marketable securities are held primarily to meet:Answer transactions motivesprecautionary motivesspeculative motivesleverage motives.5 pointsQuestion 7A firm’s excess cash balance during a particular month could be best deployed if it wereAnswer financed with short term investmentsfinanced with long term investmentsinvested in short term investmentsinvested in long term investments.5 pointsQuestion 8The objective of managing current assets and liabilities is toAnswer achieve as low a level of current assets as possible.achieve as low a level of current liabilities as possible.achieve a balance between profitability and risk that contributes to the firm’s value.achieve as high a level of current liabilities as possible..5 pointsQuestion 9The ________ is the time period that elapses from the point when the firm makes the outlay to purchase raw materials on account to the point when payment is made to the supplier of the goods.Answer cash conversion cycleaverage payment periodaverage age of inventoryaverage collection period.5 pointsQuestion 10In the cash budget, the firm’s final sales forecast us usually a function ofAnswer economic forecasts.the sales force estimate of demand.external and internal factors in combination.accounts payable experience..5 pointsQuestion 11A revolving credit agreement is a:Answer banker’s agreement to extend the maturity of a loanbanker’s standby agreement to provide a guaranteed line of credit for a specified period of timelarge loan supported by a group of banks on an alternating basisloan arrangement with a bank whereby secured and unsecured loans are alternately used.5 pointsQuestion 12A short-term promissory note sold by high-credit-quality corporations and is backed solely by the credit quality of the issuer is called:Answer commercial papera line of credita revolving credit agreementa factoring arrangement.5 pointsQuestion 13Commercial finance companies:Answer make riskier unsecured business loans but charge higher interest ratesspecialize in loans secured by inventories and real estateconcentrate their lending activity to firms pledging the notes receivable of their customersare primarily interested in loans secured by a business customer’s accounts receivable and inventories.5 pointsQuestion 14The purchaser may deduct 2% from the purchase price if payment is made within 10 days; but if not paid within 10 days, the net amount of the purchase is due within 30 days. The sale is made on what terms?Answer 10/30, net/22/10, net/302/30, net/1010/2, net/30.5 pointsQuestion 15Commercial paper dealers:Answer lend to small and large businesses on the basis of their receivables outstandingrestrict their paper dealings to negotiable certificates of commercial banksdistribute to investors the promissory notes of successful businessesdistribute to investors the promissory notes of small but rapidly developing businesses.5 pointsQuestion 16Which one of the following capital-budgeting evaluation techniques is based on finding a discount rate which causes the net present value to be zero?Answer net present valueinternal rate of returnprofitability indexpayback.5 pointsQuestion 17Which one of the following best explains the impact on a firm that accepts a project with a negative NPV?Answer negative cash flowsdecrease in the value of the firmhigh marginal cost of capitallow initial returns.5 pointsQuestion 18The corporate planning tool that develops project plans that fit well with the firm’s plans is often referred to by the following acronym:Answer MOGS.SMOG.OMGS.GOMS..5 pointsQuestion 19The payback period concept is best explained by which of the following?Answer marginal cost of capitalpoint where initial investment has been returnedrate where NPV is equal to zeroaccounting rate of return.5 pointsQuestion 20The stage in the capital budgeting process in which implemented projects are periodically reviewed is called the _____________ stage.Answer follow-up.selection.identification.implementation..5 pointsQuestion 21The estimate of how quickly a firm may grow by maintaining a constant mix of debt and equity is called:Answer the retention growth ratedividend growth ratesustainable growth ratethe internal growth rate.5 pointsQuestion 22What should be the relation between the target capital structure for a firm and the firm’s optimum capital structure?Answer Target and optimum capital structures should be the same.Target capital structure is more conservative overall.Target capital structure contains more debt.Target capital structure excludes preferred stock..5 pointsQuestion 23Other factors being constant, higher fixed operating costs mean:Answer higher financial leveragehigher operating leveragelower combined leveragethe degree of financial leverage is equal to 1.0.5 pointsQuestion 24In calculating the cost of new common stock using the constant dividend growth model, it is important that the __________ are subtracted from the price of the stock.Answer flotation costspar valuecost of retained earningsproceeds of the sale.5 pointsQuestion 25Which of the following is a correct way to calculate degree of combined leverage?Answer divide DFL by DOLmultiply DOL by DFLdivide DOL by DFLadd DOL and DFL.