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

Finacial Management MCQs

  

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