Financial Management | Chapter 4 | Part 4 | MBA MCQs | FM

Finacial Management MCQs

  

 

1. Which of the following statements (in general) is correct?
   1.   A low receivables turnover is desirable.
   2.   The lower the total debt-to-equity ratio, the lower the financial risk for a firm.
   3.   An increase in net profit margin with no change in sales or assets means a poor ROI.
   4.   The higher the tax rate for a firm, the lower the interest coverage ratio.
2. A capital investment is one that
   1.   has the prospect of long-term benefits
   2.   has the prospect of short-term benefits.
   3.   is only undertaken by large corporations.
   4.   applies only to investment in fixed assets
3. Which of the following would be consistent with a more aggressive approach to financing workingcapital?
   1.   Financing short-term needs with short-term funds
   2.   Financing permanent inventory buildup with long-term debt.
   3.   Financing seasonal needs with short-term funds.
   4.   Financing some long-term needs with short-term funds
4. Which asset-liability combination would most likely result in the firm's having the greatest risk oftechnical insolvency?
   1.   Increasing current assets while lowering current liabilities
   2.   Replacing short-term debt with equity
   3.   Increasing current assets while incurring more current liabilities.
   4.   Reducing current assets, increasing current liabilities, and reducing long-term debt.
5. Which of the following illustrates the use of a hedging (or matching) approach to financing?
   1.   Short-term assets financed with long-term liabilities
   2.   Permanent working capital financed with long-term liabilities.
   3.   Short-term assets financed with equity.
   4.   All assets financed with 50 percent equity, 50 percent long-term debt mixture
6. In deciding the appropriate level of current assets for the firm, management is confronted with
   1.   a trade-off between profitability and risk.
   2.   a trade-off between liquidity and marketability
   3.   a trade-off between equity and debt.
   4.   a trade-off between short-term versus long-term borrowing
7. Spontaneous financing includes
   1.   accounts receivable.
   2.   accounts payable.
   3.   short-term loans.
   4.   a line of credit.
8. Permanent working capital
   1.   varies with seasonal needs
   2.   includes fixed assets
   3.   is the amount of current assets required to meet a firm's long-term minimum needs
   4.   includes accounts payable
9. Financing a long-lived asset with short-term financing would be
   1.   an example of "moderate risk -- moderate (potential) profitability" asset financing
   2.   an example of "high risk -- high (potential) profitability" asset financing
   3.   an example of "low risk -- low (potential) profitability" asset financing.
   4.   an example of the "hedging approach" to financing
10. A firm's inventory turnover (IT) is 5 times on a cost of goods sold (COGS) of $800,000. If the IT isimproved to 8 times while the COGS remains the same, a substantial amount of funds is released from or additionally invested in inventory. In fact,
    1.   $160,000 is released.
    2.   $100,000 is additionally invested.
    3.   $60,000 is additionally invested.
    4.   $60,000 is released
11. An increase in the firm's receivable turnover ratio means that:
    1.   it is collecting credit sales more quickly than before.
    2.   cash sales have decreased.
    3.   it has initiated more liberal credit terms.
    4.   inventories have increased.
12. A single, overall cost of capital is often used to evaluate projects because:
    1.   it avoids the problem of computing the required rate of return for each investment proposal.
    2.   it is the only way to measure a firm's required return.
    3.   it acknowledges that most new investment projects have about the same degree of risk.
    4.   it acknowledges that most new investment projects offer about the same expected return.
13. The cost of equity capital is all of the following EXCEPT:
    1.   the minimum rate that a firm should earn on the equity-financed part of an investment
    2.   generally lower than the before-tax cost of debt.
    3.   by far the most difficult component cost to estimate.
    4.   a return on the equity-financed portion of an investment that, at worst, leaves the market price of thestock unchanged.
14. Market values are often used in computing the weighted average cost of capital because
    1.   this is the simplest way to do the calculation.
    2.   this is consistent with the goal of maximizing shareholder value.
    3.   this is required in the U.S. by the Securities and Exchange Commission.
    4.   this is a very common mistake.
15. The term "capital structure" refers to:
    1.   long-term debt, preferred stock, and common stock equity.
    2.   current assets and current liabilities.
    3.   total assets minus liabilities.
    4.   shareholders' equity
16. If the weighting of equity in total capital is 1/3, that of debt is 2/3, the return on equity is 15% that ofdebt is 10% and the corporate tax rate is 32%, what is the Weighted Average Cost of Capital (WACC)?
    1.   10.533%
    2.   7.533%
    3.   9.533%
    4.   11.350%
17. What is the difference between the current ratio and the quick ratio?
    1.   The current ratio includes inventories and the quick ratio does not.
    2.   The current ratio does not include inventories and the quick ratio does.
    3.   The current ratio includes physical capital and the quick ratio does not.
    4.   The current ratio does not include physical capital and the quick ratio does
18. Which of the following working capital strategies is the most aggressive?
    1.   Making greater use of short term finance and maximizing net short term asset
    2.   Making greater use of long term finance and minimizing net short term asset.
    3.   Making greater use of short term finance and minimizing net short term asset
    4.   Making greater use of long term finance and maximizing net short term asset.
19. Reasons for smaller exposure of foreign exchange than US money center are
    1.   regulations
    2.   prudent individuals
    3.   smaller size of assets
    4.   all of above
20. In equilibrium position, spread between foreign and domestic rate of interest must be equal to spreadof
    1.   domestic rates
    2.   forward and spot exchange rates
    3.   forward rate
    4.   spot rates