Question FIN 571 Final Exam. Chapter 1 The Goals and Functions of Financial Management

26 May Question FIN 571 Final Exam. Chapter 1 The Goals and Functions of Financial Management

Question

FIN 571 Final Exam.

Chapter 1 The Goals and Functions of Financial Management

Multiple Choice Questions

1. What is the primary goal of financial management?
A) Increased earnings
B) Maximizing cash flow
C) Maximizing shareholder wealth
D) Minimizing risk of the firm

2. The partnership form of organization
A) avoids the double taxation of earnings and dividends found in the corporate form of organization.
B) usually provides limited liability to the partners.
C) has unlimited life.
D) simplifies decision making.

3. Increased productivity due to technology has
A) increased corporations’ reliance on debt for capital expansion needs.
B) created larger asset values on the firm’s historical balance sheet.
C) made it cheaper (in terms of interest costs) for firms to borrow money.
D) helped to keep corporate costs in check.

4. Insider trading occurs when
A) someone has information not available to the public which they use to profit from trading in stocks.
B) corporate officers buy stock in their company.
C) lawyers, investment bankers, and others buy common stock in companies represented by their firms.
D) any stock transactions occur in violation of the Federal Trade Commissions restrictions on monopolies.

Chapter 2 Review of Accounting

5. When a firm’s earnings are falling more rapidly than its stock price, its P/E ratio will:
A) remain the same
B) go up
C) go down
D) could go either up or down

6. The net worth of a firm
A) is usually the same as the firm’s market value.
B) is based on current asset costs.
C) is based on current liabilities.
D) none of the above.

7. A statement of cash flows allows a financial analyst to determine
A) whether a cash dividend is affordable.
B) how increases in asset accounts have been financed.
C) whether long-term assets are being financed with long-term or short-term financing.
D) all of the above

8. A firm has $200,000 in current assets, $400,000 in long-term assets, $80,000 in current liabilities, and $200,000 in long-term liabilities. What is its net working capital?
A) $120,000
B) $320,000
C) $520,000
D) none of the above

Chapter 3 Financial Analysis

Multiple Choice Questions

9. The ______________ method of inventory costing is least likely to lead to inflation-induced profits.
A) FIFO
B) LIFO
C) Weighted average
D) Lower of cost or market

10. The Bubba Corp. had net income before taxes of $200,000 and sales of $2,000,000. If it is in the 50% tax bracket its after-tax profit margin is:
A) 5%
B) 12%
C) 20%
D) 25%

11. XYZ’s receivables turnover is 10x. The accounts receivable at year-end are $600,000. The average collection period is 90 days (3 months). What was the sales figure for the year?
A) $60,000
B) $6,000,000
C) $24,000,000
D) none of the above

12. A firm has total assets of $2,000,000. It has $900,000 in long-term debt. The stockholders equity is $900,000. What is the total debt to asset ratio?
A) 45%
B) 40%
C) 55%
D) none of the above

Chapter 4 Financial Forecasting

13. Required production during a planning period will depend on the
A) beginning inventory of products.
B) sales during the period.
C) desired level of ending inventory.
D) all of the above

14. XYZ Co. has forecasted June sales of 600 units and July sales of 1000 units. The company maintains ending inventory equal to 125% of next month’s sales. June beginning inventory reflects this policy. What is June’s required production?
A) 1100 units
B) -0- units
C) 500 units
D) 400 units

15. The difference between total receipts and total payments referred to as
A) cumulative cash flow.
B) beginning cash flow.
C) net cash flow.
D) cash balance.

16. In developing the pro forma income statement we follow four important steps:
1) compute other expenses,
2) determine a production schedule,
3) establish a sales projection,
4) determine profit by completing the actual pro forma statement.

What is the correct order for these four steps?
A) 1,2,3,4
B) 4,3,2,1
C) 2,1,3,4
D) 3,2,1,4

Chapter 5 Operating and Financial Leverage

17. In break-even analysis the contribution margin is defined as
A) sales minus variable costs.
B) sales minus fixed costs.
C) variable costs minus fixed costs.
D) fixed costs minus variable costs.

18. Firm A employs a high degree of operating leverage; Firm B takes a more conservative approach. Which of the following comparative statements about firms A and B is true?
A) A has a lower break-even point than B, but A’s profit grows faster after the break-even.
B) A has a higher break-even point than B, but A’s profit grows slower after the break-even.
C) B has a lower break-even point than A, but A’s profit grows faster after break-even.
D) B has a lower break-even point than A, and profit grows the same rate for both companies after the breakeven point.

19. Heavy use of long-term debt may be beneficial in an inflationary economy because
A) the debt may be repaid in more “expensive” dollars.
B) nominal interest rates exceed real interest rates.
C) inflation is associated with the peak of a business cycle.
D) the debt may be repaid in “cheaper” dollars.

20. Under which of the following conditions could the overuse of financial leverage be detrimental to the firm?
A) Stable industry
B) Cyclical demand for the firm’s products.
C) Upswing of business cycle.
D) Low interest cost compared to return on assets

Chapter 6 Working Capital and the Financial Decision

21. Risk exposure due to heavy short-term borrowing can be compensated for by
A) carrying highly liquid assets.
B) carrying illiquid assets.
C) carrying longer term, more profitable current assets.
D) carrying more receivables to increase cash flow.

22. When actual sales are greater than forecasted sales
A) inventory will decline.
B) production schedules might have to be revised upward.
C) accounts receivable will rise.
D) all of the above

23. Yield curves change daily to reflect
A) changing conditions in the money and capital markets.
B) new inflation expectations.
C) changing conditions in the overall economy.
D) all of the above.

24. Retail companies like Target and Limited Brands are more likely to have
A) stable sales and earnings per share.
B) cyclical sales but less volatile earnings per share.
C) cyclical sales and more volatile earnings per share.
D) cyclical sales but stable accounts receivable and inventory.

Chapter 7 Current Asset Management

25. When using the economic order quantity model
A) ordering costs increase as the level of inventory increases.
B) carrying costs decrease as the level of inventory increases.
C) costs are minimized when total carrying costs and total ordering costs are equal.
D) none of the above

26. Hedging
A) is a way to protect your accounts receivable position.
B) increases risk.
C) is a legal agreement to buy or sell a financial futures contract.
D) can be carried out with a futures contract.

27. Which of the following is not a true statement about commercial paper?
A) Finance paper is sold directly to the lender by the finance company.
B) Finance paper is also referred to as direct paper.
C) Dealer paper is sold directly to the lender by a finance company.
D) Industrial companies, utility firms or finance companies too small to sell direct paper sell dealer paper.

28. Which of the following best describes the benefits to the borrower of selling asset backed securities?
A) Due to the portfolio effect, the borrower can package up low quality accounts receivable and sell them for a premium price.
B) The borrower trades future cash flows for current cash flows.
C) The asset-backed security is likely to carry a high credit rating of AA or better.
D) b and c are correct.

29. Price Corp. is considering selling to a group of new customers and creating new annual sales of $70,000. 5% will be uncollectible. The collection cost on these accounts is 3.5% of new sales, the cost of producing and selling is 80% of sales and the firm is in the 31% tax bracket. What is the profit on new sales?
A) $5,554.50
B) $9,660.00
C) $7,245.00
D) none of the above.

Chapter 8 Sources of Short-Term Financing

30. Mr. Jones borrows $2,000 for 90 days and pays $35 interest. What is his effective rate of interest?
A) 9.3%
B) 7.0%
C) 11.7%
D) None of the above

31. The prime rate
A) is the effective rate of interest for banks’ best customers.
B) has been quite volatile during the past two decades, moving as much as 8 percentage points in a 12-month period.
C) is usually lower than treasury bill rates.
D) none of the above

32. Accounts receivable may be used as a source of financing by
A) pledging the receivables as loan collateral.
B) factoring the receivables to a finance company.
C) selling securities backed by the receivables.
D) all of the above

33. The required compensating balance is usually computed as a
A) percentage of customer loans outstanding.
B) factor of accounts receivable.
C) percentage of the bank’s commitments toward future loans.
D) a and c are correct

Chapter 9 The Time Value of Money

34. The concept of time value of money is important to financial decision making because
A) it emphasizes earning a return on invested capital.
B) it recognizes that earning a return makes $1 worth more today than $1 received in the future.
C) it can be applied to future cash flows in order to compare different streams of income.
D) all of the above

35. Mr. Nailor invests $5,000 in a certificate of deposit at his local bank. He receives annual interest of 8% for 7 years. How much interest will his investment earn during this time period?
A) $2,915
B) $3,570
C) $6,254
D) $8,570

36. Mr. Fish wants to build a house in 10 years. He estimates that the total cost will be $170,000. If he can put aside $10,000 at the end of each year, what rate of return must he earn in order to have the amount needed?
A) Between 11% and 12%
B) Between 8% and 9%
C) 17%
D) None of the above

Chapter 10 Valuation and Rates of Return

37. A 20-year bond pays 12% on a face value of $1,000. If similar bonds are currently yielding 9%, What is the market value of the bond? Use annual analysis.
A) over $1,000
B) under $1,000
C) over $1,200
D) not enough information given to tell

38. An issue of preferred stock is paying an annual dividend of $5. The growth rate for the firm’s common stock is 14%. What is the preferred stock price if the required rate of return is 11%?
A) $45.45
B) $41.67
C) $35.71
D) none of the above

39. Which of the following does not influence the yield to maturity for a security?
A) required real rate of return
B) risk free rate
C) business risk
D) yields of similar securities

40. The cost of common stock is usually greater than the simple dividend yield because
A) investors perceive risk in common stock.
B) investors expect both a current dividend and future growth.
C) dividends are not tax-deductible.
D) the company must make profits before it can pay dividends.

41. The dividend valuation model stresses the
A) importance of earnings per share.
B) importance of dividends and legal rules for maximum payment.
C) relationship of dividends to market prices.
D) relationship of dividends to earnings per share.