True or False Questions
1. Financial management is concerned with the maintenance and creation of wealth.
2. The current ratio and the acid test ratio are both measures of financial leverage.
3. Sales occurring in the secondary markets increase the total stock of financial assets that exist in the economy.
4. The key ingredient in a firm's financial planning is the sales forecast.
5. The present value of an annuity increases as the discount rate increases.
6. As the volume of production increases, the fixed cost per unit of the product decreases.
7. Whenever the IRR on a project equals that project's required rate of return, the NPV equals zero.
8. The hedging principle involves matching the cash flow from an asset with the cash flow requirements of the financing used.
9. Because they operate within a highly uncertain environment, utilities hold a large percentage of their total assets in cash.
10. Accounts receivable are an asset that reflects sales made on credit.
11. Working capital for a project includes investment in fixed assets.
12. Sales captured from the firm's competitors can be relevant to the capital-budgeting decision.
13. The weighted average cost of capital is the minimum required return that must be earned on additional investment if firm value is to remain unchanged.
14. The firm financed completely with equity capital has a cost of capital equal to the required return on common stock.
15. Financial structure includes long-term and short-term sources of funds.
16. Real assets should be financed with temporary capital due to the short-term nature of depreciation expense.
17. The nature of a firm's assets has a major influence on the types of financial capital a firm uses.
18. Compared with other developed countries, the U.S. is particularly reliant on foreign trade for self-subsistence.
19. The foreign exchange market is similar in form to the New York Stock Exchange.
20. The efficiency of foreign currency markets is ensured, in large measure, by the process of arbitrageurs.
21. Foreign currency forward rates aid traders by reducing uncertainty regarding future market fluctuations.
22. Capital markets in foreign countries in general are becoming more integrated due to the widespread availability of interest rate and currency swaps.
Multiple Choice Questions
23. Which of the following statements best represents what finance is about?
24. Which of the following factors enable a public corporation to grow to a greater extent, and perhaps at a faster rate, than a partnership or a proprietorship?
25. Which of the following decrease new competition in competitive markets?
26. Kingsbury Associates has current assets as follows:
Accounts receivable $4,500
If Kingsbury has a current ratio of 3.2, what is its quick ratio?
27. Millers Metalworks, Inc. has a total asset turnover of 2.5 and a net profit margin of 3.5%. The total debt ratio for the firm is 50%. Calculate Millers's return on equity.
28. Which of the following is not a driving force of the operating profit margin?
29. Where is the availability of prices most continuous?
30. Which of the following refers to the institutions and procedures that provide for transactions in short-term debt instruments?
31. A company collects 60% of its sales during the month of the sale, 30% one month after the sale, and 10% two months after the sale. The company expects sales of $10,000 in August, $20,000 in September, $30,000 in October, and $40,000 in November. How much money is expected to be collected in October?
32. Which of the following is a source of external capital?
33. Which of the following expenses should be included as a cash outlay in the preparation of a cash budget?
34. At 8% compounded annually, how long will it take $750 to double?
35. You wish to borrow $2,000 to be repaid in 12 monthly installments of $189.12. The annual interest rate is:
36. Which of the following formulas represents the future value of $500 invested at 8% compounded quarterly for five years?
37. Which of the following is NOT an example of variable costs?
38. Financial leverage means financing some of a firm's assets with:
39. The NPV assumes cash flows are reinvested at the:
40. A project has an initial outlay of $4,000. It has a single payoff at the end of Year 4 of $6,996.46. What is the IRR for the project (round to the nearest percent)?
41. An increase in ___________________ would increase a firm's liquidity.
42. A quite risky working capital management policy would have a high ratio of:
43. The precautionary motive for holding cash assumes that balances are held:
44. The primary concern in the management of cash and marketable securities for an operating company is to:
45. Which of the following is considered to be a spontaneous source of financing?
46. The purpose of carrying inventory is to:
47. The net present value always provides the correct decision provided that:
48. When selecting the best project from a group of mutually exclusive projects you should choose the project with the highest:
49. The most expensive source of capital is:
50. When calculating the average cost of capital, which of the following has to be adjusted for taxes?