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Multiple Choice questions in working capital and financing
1. Which of the following is not a reason why financial analysts use ratio analysis?
a. Ratios help to pinpoint a firm`s strengths.
b. Ratios restate accounting data in relative terms.
c. Ratios are ideal for smoothing out the differences that may exist when comparing firms that use different accounting practices.
d. Some of a firm`s weaknesses can be identified through the usage of ratios.
2. Which of the following relationships is true, regarding the costs of issuing the below securities?
a. Common stock > bonds > preferred stock
b. Preferred stock > common stock > bonds
c. Bonds > common stock > preferred stock
d. Common stock > preferred stock > bonds
3. According to the SEC, the correct sequence of events for a security issue is:
a. red herring, final prospectus, SEC registration.
b. SEC registration, red herring, final prospectus.
c. final prospectus, SEC registration, red herring.
d. red herring, SEC registration, final prospectus.
4. What is the most important ingredient in developing a firm`s financial plan?
a.A forecast of sales revenues
b.Determining the amount of dividends to pay shareholders
c.Projecting the rate of interest on proposed new debt
d.Deciding upon which method of depreciation a firm should utilize
5.Which of the following statements about the percent-of-sales method of financial forecasting is true?
a.It is the least commonly used method of financial forecasting.
b.It is a much more precise method of financial forecasting than a cash budget would be.
c.It involves estimating the level of an expense, asset, or liability for a future period as a percent of the forecast for sales revenues.
d.It projects all liabilities as a fixed percentage of sales.
6.You wish to borrow $2,000 to be repaid in 12 monthly installments of $189.12. The annual interest rate is:
7.If you invest $750 every six months at 8% compounded semi-annually, how much would you accumulate at the end of 10 years?
8.The focus of current asset management is on:
a.property, plant, and equipment acquisition.
b.cash, accounts receivable, and inventory levels.
c.investments in marketable securities.
d.both a and c.
e.all of the above.
9.With regard to the hedging principle, which of the following assets should be financed with current liabilities?
a.Minimum level of cash required for year-round operations
b.Expansion of accounts receivable to meet seasonal demands
c.Machinery used to produce a firm`s inventory
d. Both a and b
e. Both b and c
10.If you place $50 in a savings account with an interest rate of 7% compounded weekly, what will the investment be worth at the end of five years (round to the nearest dollar)?
11.The break-even model enables the manager of the firm to:
a.calculate the minimum price of common stock for certain situations.
b.set appropriate equilibrium thresholds.
c.determine the quantity of output that must be sold to cover all operating costs.
d.determine the optimal amount of debt financing to use.
12.A firm that uses large amounts of debt financing in an industry characterized by a high degree of business risk would have __________ earnings per share fluctuations resulting from changes in levels of sales.
13.A machine costs $1,000, has a three-year life, and has an estimated salvage value of $100. It will generate after-tax annual cash flows (ACF) of $600 a year, starting next year. If your required rate of return for the project is 10%, what is the NPV of this investment? (Round your answerwer to the nearest $10.)
14.If the NPV of a project is positive, then the project`s IRR ____________ the required rate of return.
a.must be less than
b.must be greater than
c.could be greater or less than
d.cannot be determined without actual cash flows
15.Once a cash discount period has passed:
a.one should pay immediately.
b.there is no financial incentive to pay before the final due date.
c.one should pay after the final due date.
d.cannot be determined from the information.
16.A managerial benefit of a lock box arrangement is:
a.better audit control of the documents received.
b.elimination of clerical functions.
c.less chance of losing documents.
d.all of the above.
17.A firm expects total demand for its product over the planning period to be 10,000 units with an ordering cost per order of $400 and a carrying cost per unit of $2. This firm`s economic ordering quantity is:
a.is used to deal with the two most limited assumptions of the EOQ model.
b.must be higher the more certain are the inflows and outflows from the inventory.
c.will be lower when costs of carrying additional inventory are low.
d.does not affect average inventory levels.
19.Which of the following statements is consistent with long-term financing leases?
a.They are not reported on the balance sheet.
b.They are addressed in the footnotes to the annual report.
c.They result in interest expense on the company`s income statement.
d.Both b and c.
e.All of the above.