Financial Management | Chapter 2 | Part 3 | MBA MCQs | FM

Financial Management MCQs

  

 

1. All of the following influence capital budgeting cash flows EXCEPT:
   1.   accelerated depreciation.
   2.   method of project financing used.
   3.   tax rate changes.
   4.   salvage value.
2. The estimated benefits from a project are expressed as cash flows instead of income flows because:
   1.   it is simpler to calculate cash flows than income flows.
   2.   this is required by the Securities and Exchange Commission.
   3.   this is required by the Internal Revenue Service.
   4.   it is cash, not accounting income, that is central to the firm's capital budgeting decision.
3. A capital investment is one that
   1.   has the prospect of long-term benefits.
   2.   applies only to investment in fixed assets.
   3.   is only undertaken by large corporations.
   4.   has the prospect of short-term benefits.
4. A profitability index of .85 for a project means that:
   1.   the present value of benefits is 85% greater than the project's costs.
   2.   the payback period is less than one year.
   3.   the project returns 85 cents in present value for each current dollar invested.
   4.   the project's NPV is greater than zero.
5. Which of the following statements is correct?
   1.   If the NPV of a project is greater than 0, its PI will equal 0.
   2.   If the PI of a project is less than 1, its NPV should be less than 0.
   3.   If the IRR of a project is 0%, its NPV, using a discount rate, k, greater than 0, will be 0.
   4.   If the IRR of a project is greater than the discount rate, k, its PI will be less than 1 and its NPV will be greater than 0.
6. A project's profitability index is equal to the ratio of the...... of a project's future cash flows to the project's........ .
   1.   present value; initial cash outlay
   2.   present value; depreciable basis
   3.   net present value; depreciable basis
   4.   net present value; initial cash outlay
7. The discount rate at which two projects have identical........... is referred to as Fisher's rate of intersection
   1.   present values
   2.   profitability indexes
   3.   IRRs
   4.   net present values
8. Two mutually exclusive investment proposals have "scale differences" (i.e., the cost of the projects differ). Ranking these projects on the basis of IRR, NPV, and PI methods............. give contradictory results.
   1.   will always
   2.   will generally
   3.   will never
   4.   may
9. Preferred shareholders' claims on assets and income of a firm come........ those of creditors........... those of common shareholders.
   1.   before; and also before
   2.   equal to; and equal to
   3.   after; but before
   4.   after; and also after
10. You are considering two mutually exclusive investment proposals, project A and project B. B's expected value of net present value is $1,000 less than that for A and A has less dispersion. On the basis of risk and return, you would say that
    1.   Project A dominates project B.
    2.   Project B dominates project A.
    3.   Project A is more risky and should offer greater expected value.
    4.   Each project is high on one variable, so the two are basically equal.
11. To increase a given present value, the discount rate should be adjusted
    1.   upward.
    2.   downward.
    3.   No change.
    4.   constant
12. In finance, "working capital" means the same thing as
    1.   total assets.
    2.   current assets minus current liabilities.
    3.   current assets.
    4.   fixed assets.
13. Which of the following would be consistent with a more aggressive 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 permanent inventory buildup with long-term debt.
    4.   Financing seasonal needs with short-term funds.
14. Which asset-liability combination would most likely result in the firm's having the greatest risk of technical insolvency?
    1.   Increasing current assets while lowering current liabilities.
    2.   Replacing short-term debt with equity.
    3.   Reducing current assets, increasing current liabilities, and reducing long-term debt.
    4.   Increasing current assets while incurring more current liabilities.
15. 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.
16. In deciding the appropriate level of current assets for the firm, management is confronted with
    1.   a trade-off between liquidity and marketability.
    2.   a trade-off between short-term versus long-term borrowing.
    3.   a trade-off between profitability and risk.
    4.   a trade-off between equity and debt.
17. ...varies inversely with profitability.
    1.   Liquidity.
    2.   Risk
    3.   Financing.
    4.   Liabilities.
18. Spontaneous financing includes
    1.   accounts receivable.
    2.   accounts payable.
    3.   short-term loans.
    4.   a line of credit.
19. Permanent working capital
    1.   varies with seasonal needs.
    2.   includes accounts payable
    3.   includes fixed assets.
    4.   is the amount of current assets required to meet a firm's long-term minimum needs
20. 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 "low risk -- low (potential) profitability" asset financing.
    3.   an example of "high risk -- high (potential) profitability" asset financing.
    4.   an example of the "hedging approach" to financing.