Financial Management | Chapter 5 | Part 1 | MBA MCQs | FM

Finacial Management MCQs

  

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1. Which of the following would be consistent with a conservative approach to financing working capital?
   1.   Financing some long-term needs with short-term funds.
   2.   Financing short-term needs with short-term funds.
   3.   Financing short-term needs with long-term debt.
   4.   Financing seasonal needs with short-term funds
2. Which of the following illustrates the use of a hedging approach to financing assets?
   1.   Short-term assets financed with equity
   2.   Permanent working capital financed with long-term liabilities.
   3.   All assets financed with a mixture of 50% equity and 50% long-term debt.
   4.   Temporary current assets financed with long-term liabilities.
3. Your firm has a philosophy that is analogous to the hedging (maturity matching) approach. Which of the following is the most appropriate non-spontaneous form for financing the excess seasonal current asset needs?
   1.   Common stock equity.
   2.   Trade credit.
   3.   6-month bank notes.
   4.   Accounts payable.
4. Which one of the following most accurately describes capital gearing?
   1.   The ratio of interest charges to profits
   2.   The ratio of capital employed to sales
   3.   The ratio of debt to shareholders' funds or total assets
   4.   The ratio of current borrowing to this year's capital repayments
5. The amount of current assets required to meet a firm's long-term minimum needs is referred to as __________ working capital.
   1.   net
   2.   permanent
   3.   gross
   4.   temporary
6. Which of the following statements is correct for an aggressive financing policy for a firm relative to a former conservative policy?
   1.   The firm will use long-term financing to finance all fixed and current assets
   2.   The firm will see an increase in its expected profits.
   3.   The firm will see a decline in its risk profile.
   4.   The firm will need to issue additional common stock this period to finance the assets.
7. Your firm has a philosophy that is analogous to the hedging (maturity matching) approach. Which of the following is the most appropriate form for financing a new capital investment in plant and equipment?
   1.   Accounts payable.
   2.   Common stock equity.
   3.   6-month bank notes.
   4.   Trade credit.
8. The amount of current assets that varies with seasonal requirements is referred to as __________ working capital
   1.   temporary
   2.   permanent
   3.   gross
   4.   net
9. To financial analysts, "net working capital" means the same thing as __________.
   1.   current assets
   2.   fixed assets
   3.   total assets
   4.   current assets minus current liabilities.
10. If a company moves from a "conservative" working capital policy to an "aggressive" policy, it should expect __________.
    1.   expected profitability to increase, whereas risk would decrease
    2.   risk and profitability to decrease
    3.   liquidity would increase, whereas risk would also increase
    4.   liquidity to decrease, whereas expected profitability would increase
11. Which of the following statements is correct for a conservative financing policy for a firm relative to a former aggressive policy?
    1.   The firm will see an increase in its expected profits.
    2.   The firm will increase its dividends per share (DPS) this period.
    3.   The firm uses long-term financing to finance all fixed and current assets.
    4.   The firm will see an increase in its risk profile
12. Under a conservative financing policy a firm would use long-term financing to finance some of the temporary current assets. What should the firm do when a "dip" in temporary current assets causes total assets to fall below the total long-term financing?
    1.   Use the excess funds to repurchase common stock.
    2.   Invest the excess long-term financing in marketable securities.
    3.   Use the excess funds to pay down long-term debt.
    4.   Purchase additional plant and equipment
13. In deciding the optimal level of current assets for the firm, management is confronted with __________.
    1.   a trade-off between profitability and risk
    2.   a trade-off between equity and debt
    3.   a trade-off between short-term versus long-term borrowing
    4.   a trade-off between liquidity and risk
14. Which of the following statements is most correct?
    1.   Strict adherence to the maturity matching approach to financing would call for all current assets to be financed solely with current liabilities.
    2.   For small companies, long-term debt is the principal source of external financing.
    3.   Similar to the capital structure management, working capital management requires the financial manager to make a decision and not address the issue again for several months.
    4.   Current assets of the typical manufacturing firm account for over half of its total assets.
15. Having defined working capital as current assets, it can be further classified according to __________.
    1.   rate of return and financing method
    2.   financing method and time
    3.   components and time
    4.   time and rate of return
16. Which of the following would be consistent with an aggressive approach to financing working capital?
    1.   Financing some long-term needs with short-term funds.
    2.   Financing seasonal needs with short-term funds
    3.   Financing short-term needs with short-term funds.
    4.   Financing permanent inventory buildup with long-term debt.
17. Which of the following would be consistent with a hedging (maturity matching) approach to financing working capital?
    1.   Financing short-term needs with long-term debt.
    2.   Financing short-term needs with short-term funds.
    3.   Financing seasonal needs with long-term funds.
    4.   Financing some long-term needs with short-term funds.
18. Which of the following is a basic principle of finance as it relates to the management of working capital?
    1.   Liquidity moves together with risk.
    2.   Profitability moves together with risk
    3.   Profitability moves together with liquidity
    4.   Profitability varies inversely with risk.
19. Risk, as it relates to working capital, means that there is jeopardy to the firm for not maintaining sufficient current assets to __________.
    1.   meet its cash obligations as they occur and take advantage of prompt payment discounts
    2.   meet its cash obligations as they occur and support the proper level of sales
    3.   support the proper level of sales and take prompt payment discounts
    4.   maintain current and acid-test ratios at or above industry norms
20. How can a firm provide a margin of safety if it cannot borrow on short notice to meet its needs?
    1.   Maintain a low level of current assets (especially cash and marketable securities).
    2.   Lengthening the maturity schedule of financing.
    3.   Shorten the maturity schedule of financing.
    4.   Increasing the level of fixed assets (especially plant and equipment).