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

Finacial Management MCQs

  

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1. An increase in the firm's receivable turnover ratio means that:
   1.   inventories have increased.
   2.   it has initiated more liberal credit terms
   3.   cash sales have decreased.
   4.   it is collecting credit sales more quickly than before.
2. A single, overall cost of capital is often used to evaluate projects because:
   1.   it acknowledges that most new investment projects have about the same degree of risk
   2.   it acknowledges that most new investment projects offer about the same expected return.
   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.
3. The cost of equity capital is all of the following EXCEPT:
   1.   by far the most difficult component cost to estimate
   2.   a return on the equity-financed portion of an investment that, at worst, leaves the market price of the stock unchanged.
   3.   the minimum rate that a firm should earn on the equity-financed part of an investment.
   4.   generally lower than the before-tax cost of debt.
4. 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.   Higher than the present level.
   2.   No change from the present level.
   3.   Lower than the present level.
   4.   Unable to determine without more information.
5. 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.   subtracting a 5 percent risk discount from the firm's before-tax cost of debt.
   3.   subtracting a 5 percent risk discount from the firm's after-tax cost of debt.
   4.   adding a 5 percent risk premium to the firm's after-tax cost of debt.
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.   $100,000 is additionally invested.
   3.   $60,000 is released
   4.   $60,000 is additionally invested.
7. Costs of not carrying enough inventory include
   1.   possible worker layoffs.
   2.   customer disappointment.
   3.   lost sales.
   4.   all of these.
8. 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.   73 days and $120,000.
   4.   81 days and $108,000.
9. 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.   none of the above.
   4.   debt.
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.   a decrease in bad debt losses.
    2.   an increase in the average collection period
    3.   an increase in sales.
    4.   higher profits.
11. Market values are often used in computing the weighted average cost of capital because
    1.   this is consistent with the goal of maximizing shareholder value.
    2.   this is the simplest way to do the calculation
    3.   this is required in the U.S. by the Securities and Exchange Commission
    4.   this is a very common mistake
12. 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.
13. Net working capital refers to
    1.   current assets.
    2.   current assets minus inventories
    3.   total assets minus fixed assets.
    4.   current assets minus current liabilities.
14. Which of the following relationships hold true for safety stock?
    1.   the larger the opportunity cost of the funds invested in inventory, the larger the safety stock.
    2.   the greater the uncertainty associated with forecasted demand, the smaller the safety stock.
    3.   the higher the profit margin per unit, the higher the safety stock necessary.
    4.   the greater the risk of running out of stock, the smaller the safety of stock.
15. 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 = preferred stock; 2 = common stock; 3 = bonds.
    2.   1 = common stock; 2 = preferred stock; 3 = bonds.
    3.   1 = bonds; 2 = preferred stock; 3 = common stock.
    4.   1 = bonds; 2 = common stock; 3 = preferred stock
16. In calculating the proportional amount of equity financing employed by a firm, we should use:
    1.   the current market price per share of common stock times the number of shares outstanding.
    2.   the book value of the firm
    3.   the common stock equity account on the firm's balance sheet.
    4.   the sum of common stock and preferred stock on the balance sheet.
17. Which of the following marketable securities is the obligation of a commercial bank?
    1.   Commercial paper
    2.   T-bills
    3.   Negotiable certificate of deposit
    4.   Repurchase agreement
18. Which would be an appropriate investment for temporarily idle corporate cash that will be used to pay quarterly dividends three months from now?
    1.   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.
    2.   Ninety-day commercial paper with a current annual yield of 6.2 percent
    3.   A 30-year Treasury bond with a current annual yield of 8.7 percent.
    4.   A long-term AAA-rated corporate bond with a current annual yield of 9.4 percent.
19. Marketable securities are primarily
    1.   long-term debt instruments.
    2.   long-term equity securities
    3.   short-term equity securities.
    4.   short-term debt instruments.
20. The basic requirement for a firm's marketable securities.
    1.   Safety
    2.   Marketability
    3.   All of the above.
    4.   Yield