Financial Management | Chapter 5 | Part 2 | MBA MCQs | FM

Finacial Management MCQs

  

 

1. Net working capital refers to
   1.   total assets minus fixed assets.
   2.   current assets minus current liabilities.
   3.   current assets minus inventories
   4.   current assets.
2. Marketable securities are primarily
   1.   short-term debt instruments.
   2.   short-term equity securities.
   3.   long-term debt instruments.
   4.   long-term equity securities
3. Which would be an appropriate investment for temporarily idle corporate cash that will be used to pay quarterly dividends three months from now?
   1.   A long-term AAA-rated corporate bond with a current annual yield of 9.4 percent.
   2.   Common stock that has been appreciating in price 8 percent annually, on average, and paying a quarterly dividend that is the equivalent of a 5 percent annual yield.
   3.   Ninety-day commercial paper with a current annual yield of 6.2 percent
   4.   A 30-year Treasury bond with a current annual yield of 8.7 percent.
4. Which of the following marketable securities is the obligation of a commercial bank?
   1.   Commercial paper
   2.   T-bills
   3.   Repurchase agreement
   4.   Negotiable certificate of deposit
5. The basic requirement for a firm's marketable securities.
   1.   Safety
   2.   All of the above.
   3.   Marketability
   4.   Yield
6. A firm's inventory turnover (IT) is 5 times on a cost of goods sold (COGS) of $800,000. If the IT is improved 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.   $60,000 is released
   3.   $60,000 is additionally invested.
   4.   $100,000 is additionally invested.
7. Ninety-percent of X company's total sales of $600,000 is on credit. If its year-end receivables turnover is 5, the average collection period (based on a 365-day year) and the year-end receivables are, respectively
   1.   365 days and $108,000.
   2.   73 days and $108,000.
   3.   81 days and $108,000.
   4.   73 days and $120,000.
8. Costs of not carrying enough inventory include
   1.   lost sales.
   2.   possible worker layoffs.
   3.   customer disappointment.
   4.   all of these.
9. Which of the following relationships hold true for safety stock?
   1.   the greater the risk of running out of stock, the smaller the safety of stock.
   2.   the higher the profit margin per unit, the higher the safety stock necessary.
   3.   the greater the uncertainty associated with forecasted demand, the smaller the safety stock.
   4.   the larger the opportunity cost of the funds invested in inventory, the larger the safety stock.
10. Increasing the credit period from 30 to 60 days, in response to a similar action taken by all of our competitors, would likely result in:
    1.   an increase in sales.
    2.   an increase in the average collection period
    3.   a decrease in bad debt losses.
    4.   higher profits.
11. The credit policy of Spurling Products is "1.5/10, net 35." At present 30% of the customers take the discount, 62% pay within the net period, and the rest pay within 45 days of invoice. What would receivables be if all customers took the cash discount?
    1.   Lower than the present level.
    2.   No change from the present level.
    3.   Higher than the present level.
    4.   Unable to determine without more information.
12. 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.
13. 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 acknowledges that most new investment projects offer about the same expected return.
    3.   it is the only way to measure a firm's required return.
    4.   it acknowledges that most new investment projects have about the same degree of risk
14. 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.   a return on the equity-financed portion of an investment that, at worst, leaves the market price of the stock unchanged.
    3.   generally lower than the before-tax cost of debt.
    4.   by far the most difficult component cost to estimate
15. In calculating the proportional amount of equity financing employed by a firm, we should use:
    1.   the common stock equity account on the firm's balance sheet.
    2.   the sum of common stock and preferred stock on the balance sheet.
    3.   the current market price per share of common stock times the number of shares outstanding.
    4.   the book value of the firm
16. In calculating the costs of the individual components of a firm's financing, the corporate tax rate is important to which of the following component cost formulas
    1.   common stock
    2.   preferred stock.
    3.   debt.
    4.   none of the above.
17. The common stock of a company must provide a higher expected return than the debt of the same company because
    1.   there is less demand for stock than for bonds
    2.   there is a market premium required for bonds.
    3.   there is greater demand for stock than for bonds.
    4.   there is more systematic risk involved for the common stock.
18. A quick approximation of the typical firm's cost of equity may be calculated by
    1.   adding a 5 percent risk premium to the firm's before-tax cost of debt
    2.   adding a 5 percent risk premium to the firm's after-tax cost of debt.
    3.   subtracting a 5 percent risk discount from the firm's before-tax cost of debt.
    4.   subtracting a 5 percent risk discount from the firm's after-tax cost of debt.
19. 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 a very common mistake
    3.   this is consistent with the goal of maximizing shareholder value.
    4.   this is required in the U.S. by the Securities and Exchange Commission
20. Rank in ascending order (i.e., 1 = lowest, while 3 = highest) the likely after-tax component costs of a Company's long-term financing.
    1.   1 = bonds; 2 = common stock; 3 = preferred stock
    2.   1 = common stock; 2 = preferred stock; 3 = bonds.
    3.   1 = bonds; 2 = preferred stock; 3 = common stock.
    4.   1 = preferred stock; 2 = common stock; 3 = bonds.