Finance Mcq

Financial Management- Multiple Choice Questions

1. Financial Management is mainly concerned with ____________.
A. . arrangement of funds
B. all aspects of acquiring and utilizing financial resources for firms activities
C. efficient Management of every business.
D. profit maximization
ANSWER: B
2. In his traditional role the finance manager is responsible for ____________.
A. arrange of utilization of funds.
B. arrangement of financial resources.
C. acquiring capital assets of the organization.
D. effective management of capital.
ANSWER: D
3. The primary goal of the financial management is ____________.
A. to maximize the return
B. to minimize the risk.
C. to maximize the wealth of owners.
D. to maximize profit..
ANSWER: D
4. Capital budgeting is related to ____________.
A. long terms assets.
B. short term assets.
C. . long terms and short terms assets.
D. fixed assets.
ANSWER: A
5. Future value interest factor takes ____________.
A. . Compounding rate
B. Discounting rate.
C. Inflation rate.
D. Deflation rate.
ANSWER: A
6. Present value takes ____________.
A. Compounding rate.
B. Discounting rate.
C. Inflation rate.
D. Deflation rate.
ANSWER: B
7. Financial decisions involve ____________.
A. Investment, financing and dividend decisions.
B. Investment sales decisions.
C. Financing cash decisions.
D. Investment dividend decisions.
ANSWER: C
8. Traditional approach confines finance function only to ____________.
A. raising
B. mobilizing
C. utilizing
D. . financing
ANSWER: A
9. The companys cost of capital is called ____________.
A. Leverage rate
B. Hurdle rate.
C. Risk rate.
D. Return rate.
ANSWER: A
10. Market value of the shares are decided by ____________.
A. the respective companies.
B. the investment market.
C. the government .
D. share holders.
ANSWER: D
11. Cost of retained earnings is equal to ____________.
A. Cost of equity.
B. Cost of debt.
C. Cost of term loans.
D. Cost of bank loan.
ANSWER: C
12. Beta measures the ____________.
A. Financial risk.
B. Investment risk rate.
C. Market risk.
D. Market and finance risk.
ANSWER: B
13. The expansion of CAPM is ____________.
A. Capital amount pricing model.
B. Capital asset pricing model.
C. Capital asset printing model.
D. a. Capital amount printing model.
ANSWER: B
14. The companys average cost of capital is ____________.
A. the average cost of equity shares and debentures
B. the average cost of equity preference shares.
C. the average cost of all sources of long-term funds .
D. the average cost of short term funds..
ANSWER: B
15. The most difficult to calculate is ____________.
A. the cost of equity capital.
B. the cost of preferred capital.
C. the cost of retained earnings.
D. the cost of equity and preference capital.
ANSWER: B
16. The required rate of return for an investment project should ____________.
A. leave the market price of the stock unchanged
B. increase the market price.
C. reduce the market price.
D. constant market price.
ANSWER: A
17. Fixed cost per unit ____________.
A. changes according to volume of production
B. be flexible according to the rate of interest.
C. does not change with volume of production.
D. remains constant. .
ANSWER: C
18. Variable cost per unit ____________.
A. varies with the level of output.
B. remains constant irrespective of the level of output.
C. changes with the growth of the firm.
D. does not change with volume of production
ANSWER: A
19. Financial leverage measures ____________.
A. sensitivity of EBIT with respect of 1% change with respect to output
B. 1% variation in the level of production
C. sensitivity of EPS with respect to 1% change in level of EBIT.
D. no change with EBIT and EPS.
ANSWER: A
20. Operating leverage measures ____________.
A. the business risk.
B. financial risk.
C. both risks.
D. production risk.
ANSWER: D
21. Financial leverage helps one to estimate ____________.
A. the business risk
B. the financial risk.
C. both risks
D. production risk.
ANSWER: C
22. Financial leverage is also known as ____________.
A. Trading on equity
B. Trading on debt .
C. Interest on equity .
D. Interest on debt.
ANSWER: A
23. Operating leverage x financial leverage= _____.
A. composite leverage.
B. financial composite leverage.
C. operating composite leverage.
D. fixed leverage
ANSWER: C
24. Operating leverage = ______.
A. contribution less profit.
B. contribution less sales.
C. contribution less total expenses
D. contribution less operating profit.
ANSWER: B
25. . According to the traditional approach cost of capital affected by _____.
A. debt-equity mix.
B. debt-capital mix
C. equity expenses mix.
D. debt-interest mix
ANSWER: D
26. Shares having no face value are known as ____.
A. no par stock.
B. at par stock.
C. equal stock.
D. debt equity stock.
ANSWER: D
27. A fixed rate of ____________is payable on debentures.
A. dividend
B. commission
C. . interest
D. brokerage
ANSWER: D
28. Effective cost of debentures is ____________as compared to shares
A. higher
B. lower
C. equal
D. . medium
ANSWER: C
29. Ownership securities are represented by ____________.
A. securities .
B. equities
C. debt
D. debentures .
ANSWER: A
30. Corporation is not a part of ____________finance .
A. Public.
B. Private.
C. Public & private
D. Organization.
ANSWER: C
31. ____________management is the important task of the finance manager.
A. Debt
B. . Equity .
C. Profit
D. Cash .
ANSWER: D
32. Finance function is one of the most important functions of ____________.
A. business .
B. . marketing .
C. financial.
D. debt .
ANSWER: C
33. The expansion of EAR is ____.
A. equivalent annual rate.
B. equivalent annuity rate
C. equally applied rate.
D. equal advance rate
ANSWER: B
34. Arbitrage is the level processing technique introduced in ____________.
A. Net income approach
B. MM approach .
C. Operating approach
D. Traditional approach.
ANSWER: A
35. Operating incomes and the discount rate of a particular risk class are the 2 factors determining
____________.
A. Dependence hypothesis
B. Traditional view.
C. Modern view.
D. Independence hypothesis.
ANSWER: D
36. The probability of bankrupt is higher ____________.
A. for a levered firm than an unlevered firm.
B. for a unlevered firm than an levered firm
C. . only levered firm
D. only unlevered firm
ANSWER: C
37. The decision to invest a substantial sum in any business venture expecting to earn a minimum return is
called ____________.
A. working capital decision
B. . an investment decision
C. a production decision.
D. a sales decision.
ANSWER: D
38. The available capital funds are to be carefully allocated among competing projects by careful
prioritization. This is called ____________.
A. capital positioning.
B. capital structuring.
C. capital rationing.
D. capital budgeting.
ANSWER: D
39. Capital budgeting decisions in India cannot be reversed due to ____.
A. . economic conditions.
B. . ill organized market for second hand capital goods.
C. government regulations.
D. . policy of the management
ANSWER: C
40. Payback period is superior to other methods, if the objective of the investor is to ____________.
A. consider cash flow in its entirety
B. consider the present value of future cash flows
C. consider the liquidity.
D. consider the inflows in its entirety .
ANSWER: A
41. If the pay back is a bad rule, the average returns on book value is ____________.
A. worse.
B. better
C. the best
D. equal.
ANSWER: C
42. Net present value is a popular method which falls ____________.
A. With in non- discount cash flow method.
B. With in discount cash flow method
C. EqualWith in non- discount cash flow method.
D. No discount cash flow
ANSWER: C
43. A demerit of IRR method is that it does not distinguish between ____________.
A. lending & borrowing
B. . discounting & non- discounting.
C. cash flow & non- cash flow.
D. inflow & out flow.
ANSWER: C
44. Net working capital is the excess of current asset over ____________.
A. Current liability.
B. Net liability.
C. . Total payable.
D. . Total liability.
ANSWER: C
45. The gross working capital is a _____ concern concept.
A. . Going.
B. money measurement
C. revenue concept.
D. cost concept
ANSWER: B
46. The rate of return on investment ____ with the shortage of working capital
A. falls.
B. going.
C. constant.
D. change.
ANSWER: A
47. Greater the size of a business unit ____ will be the requirements of working capital.
A. lower.
B. no change.
C. larger.
D. fixed
ANSWER: A
48. The fixed proportion of working capital should be generally financed from the ____ capital sources
A. fixed .
B. variable.
C. semi-variable.
D. borrowed.
ANSWER: D
49. The volume of sales is influenced by ____ of a firm
A. finance policy.
B. credit policy.
C. profit policy .
D. fund policy.
ANSWER: D
50. Factoring is a form of financing ___.
A. payable.
B. receivables.
C. borrowings.
D. debts
ANSWER: C
51. Inventory management is essential because investments in stock are _____.
A. high
B. low.
C. medium .
D. fixed.
ANSWER: B
52. Ordering cost is the cost of ____________materials.
A. selling.
B. purchasing.
C. stocking.
D. financing.
ANSWER: A
53. The policy concerning quarters of profit to be distributed as dividend is termed as ____________.
A. Profit policy .
B. Dividend policy .
C. Credit policy.
D. Reserving policy .
ANSWER: C
54. The company must implement the bonus issues decision with in ____________. of the director approval
.
A. 6 months.
B. 3 months.
C. 2 months.
D. 1 month.
ANSWER: B
55. The most appropriate dividend policy is the payment of ____________dividend per share consent.
A. constant.
B. variable.
C. higher.
D. lower.
ANSWER: B
56. A company having easy access to the capital markets can follow a ____________. dividend policy
A. liberal.
B. formal .
C. strict.
D. Varying.
ANSWER: C
57. ____________ dividend promises to pay shareholders at future date.
A. Scrip.
B. Cash.
C. Stock.
D. Property .
ANSWER: B
58. ____________ dividend is the usual method of paying dividend .
A. Scrip.
B. Cash
C. Stock.
D. Property.
ANSWER: B
59. . The cash management refers to management of ___.
A. cash only
B. cash and bank balances.
C. cash and near cash assets
D. fixed assets.
ANSWER: B
60. Offering cash discount to customers result is ____________.
A. reducing the average collection period.
B. increasing the average collection period
C. increasing sales.
D. decreasing sales .
ANSWER: D
61. Good inventory management is good _____ management
A. financial.
B. marketing.
C. stock.
D. purchasing.
ANSWER: D
62. Setup cost is a type of ____ cost.
A. fixed.
B. variable.
C. semi variable.
D. carrying.
ANSWER: D
63. Re-order level is ____________than safety cash level .
A. higher.
B. lower.
C. medium.
D. fixed .
ANSWER: D
64. MM approach assumes that ____________markets are perfect.
A. Receivable.
B. Capital.
C. Stock.
D. Exchange .
ANSWER: D
65. The amount of the temporary working capital ____________.
A. keeps on fluctuating from time t o time.
B. remains constant for all times
C. financed through long term services
D. financed short term sources .
ANSWER: C
66. While evaluating capital investment proposal the time value of money is considered in case of
____________.
A. Pay back method.
B. Accounting rate.
C. Internal rate.
D. Discounted cash flow.
ANSWER: C
67. The return after the pay off period is not considered in case of ____________.
A. Pay back period method .
B. Interest rate method.
C. Present value method
D. Discounted cash flow method .
ANSWER: C
68. Depreciation is include in costs in case of ____________.
A. Pay back method.
B. Accounting rate.
C. Discounted cash flow.
D. Present value method.
ANSWER: A
69. The arbitrary process is the behavioral foundation for the ____________.
A. MM approach.
B. XX approach.
C. Gorder approach.
D. Miller approach.
ANSWER: B
70. The notice to Accept right share should not be less than ____________. days
A. 15.
B. 20.
C. 10.
D. 30.
ANSWER: D
71. The bonus issue is permitted to be made out of ____________ and premium collected in cash
A. free reserves.
B. free interest
C. free bonus.
D. free cash dividend.
ANSWER: A
72. The bonus issue is made to make the nominal value and the ____________ value of the shares of the
company.
A. Face.
B. Market
C. Stock.
D. Real
ANSWER: B
73. Premium received in cash is a source of ____________ issue .
A. Right.
B. Bonus.
C. Cash.
D.
ANSWER: C
74. Bonus share are not permitted unless the ____________paid shares ,if any made fully paid .
A. partly.
B. semi.
C. fully.
D. not.
ANSWER: B
75. Dividend policy of a firm affects both the long time financing and____________. wealth.
A. Owners .
B. Creditors.
C. Debtor
D. Shareholders
ANSWER: C
76. ___________is the distribution of the profits of a company among its shareholders
A. Shares.
B. Interest.
C. Dividend.
D. Commission .
ANSWER: C
77. Which of the following is not an objective of financial management?
A. Maximization of wealth of shareholders
B. Maximization of profits
C. Mobilization of funds at an acceptable cost..
D. Ensuring discipline in the organization..
ANSWER: D
78. The market value of the firm is the result of ____________.
A. dividend decisions.
B. working capital decisions.
C. capital budgeting decisions
D. trade-off between cost and risk.
ANSWER: D
79. The objective of financial management is to ______________.
A. generate the maximum net profit.
B. generate the maximum retained earnings.
C. generate the maximum wealth for its shareholders
D. . generate maximum funds for the firm at the least cost.
ANSWER: C
80. Which of the following statements represents the financing decision of a company?
A. Procuring new machineries for the R&D activities.
B. Spending heavily for the advertisement of the product of the company
C. Adopting state of the art technology to reduce the cost of production.
D. Purchasing a new building at Delhi to open a regional office.
ANSWER: D
81. Which of the following is a function of the finance manager?
A. Mobilizing funds.
B. Risk returns trade off.
C. Deployment of funds.
D. Control over the uses of funds.
ANSWER: D
82. . Financial risk arises due to the ____________.
A. variability of returns due to fluctuations in the securities market.
B. changes in prevailing interest rates in the market.
C. leverage used by the company
D. . liquidity of the assets of the company.
ANSWER: D
83. The risk that arises due to change in the purchasing power is called __________Business risk.
A. Financial risk.
B. Interest rate risk.
C. Business risk.
D. Inflation risk.
ANSWER: D
84. The factor(s) which affect(s) P/E ratio is/are _____________.
A. Growth rate
B. Debt proportion
C. Retention ratio
D. All of the above.
ANSWER: D
85. . Long -term solvency is indicated by _____________.
A. Liquidity ratio
B. Debt-equity ratio
C. Return coverage ratio
D. Both a and b
ANSWER: B
86. Which of the following is/are the problem(s) encountered in financial statement analysis?
A. Development of benchmarks
B. Window dressing.
C. Interpretation of results
D. All of the above.
ANSWER: D
87. Earnings Per Share (EPS) is equal to ____________
A. Profit before tax/No. of outstanding shares.
B. Profit after tax/No. of outstanding shares
C. Profit after tax/Amount of equity share capital.
D. Profit after tax less equity dividends/No. of outstanding shares.
ANSWER: B
88. Degree of total leverage can be applied in measuring change in _____________
A. EBIT to a percentage change in quantity.
B. EPS to a percentage change in EBIT.
C. EPS to a percentage change in quantity.
D. Quantity to a percentage change in EBIT.
ANSWER: C
89. The measure of business risk is_____________.
A. operating leverage.
B. financial leverage.
C. total leverage.
D. working capital leverage.
ANSWER: A
90. The value of EBIT at which EPS is equal to zero is known as ___________
A. Break even point.
B. Financial break even point.
C. Operating break even point
D. Overall break even point.
ANSWER: B
91. Operating leverage examines ____________.
A. The effect of the change in the quantity on EBIT
B. The effect of the change in EBIT on the EPS of the company.
C. The effect of the change in output to the EPS of the company.
D. The effect of change in EPS on the output of the company.
ANSWER: A
92. operating Leverage is the response of changes in _____________.
A. EBIT to the changes in sales..
B. EPS to the changes in EBIT
C. Production to the changes in sales.
D. None of the above.
ANSWER: A
93. Operating Leverage Measures the responsiveness of earnings per share to variability in _______
A. earnings before interest
B. taxesIs undefined at the operating break even point
C. All of the above.
D. None of the above.
ANSWER: C
94. The use of preference share capital as against debt finance _____________.
A. Reduces DFL.
B. Increases DFL.
C. Increases financial risk.
D. Both a and b.
ANSWER: B
95. The Degree of Financial Leverage (DFL) ______________.
A. Measures financial risk of the firm.
B. Is zero at financial break even point.
C. Increases as EBIT increases.
D. Both a and b.
ANSWER: A
96. The objective of financial management is to ______________.
A. Maximize the return on investment.
B. Minimize the risk.
C. Maximize the wealth of the owners by increasing the value of the firm.
D. All the above.
ANSWER: D
97. Which one of the following is not a source of long-term finance?
A. Equity capital.
B. Preference capital.
C. Commercial paper.
D. Term loan.
ANSWER: D
98. Which of the following characteristics are true, with reference to preference capital?
A. Preference dividend is tax deductible.
B. The claim of preference shareholders is prior to the claim of equity shareholders.
C. Preference share holders are not the owners of the concern.
D. All of the above
ANSWER: D
99. What are the factors which make debentures attractive to investors?
A. They enjoy a high order of priority in the event of liquidation.
B. Stable rate of return.
C. No risk.
D. All of the above.
ANSWER: D
100. The method of raising equity capital from existing members by offering securities on pro rata basis is
referred to as ______________.
A. Public issue.
B. Bonus issue.
C. Private placement.
D. Bought-Out-Deal.
ANSWER: B
101. Which of the following is not a source of long-term finance?
A. Equity shares.
B. Preference shares.
C. Commercial papers
D. . Reserves and surplus.
ANSWER: D
102. For which of the following factors are the debentures more attractive to the investors?
A. The principal is redeemable at maturity.
B. A debenture-holder enjoys prior claim on the assets of the company over its shareholders in the event
of liquidation
C. trustee is appointed to preserve the interest of the debenture holders.
D. All the above.
ANSWER: D
103. If debentures are issued by a company, ____________.
A. The interest of the debentures holders is assured by SEBI.
B. Debenture redemption reserve should be at least 75 percent of the issue amount prior to the
commencement of the redemption process
C. Call option on debentures allows the issuer to redeem the debentures at a certain price before
maturity
D. Put option on debentures allows the issuer to redeem the debentures at a certain price before maturity.
ANSWER: D
104. A company may rise capital from the primary market through _____________.
A. Public issue
B. . Rights issue
C. Bought out deals.
D. All of the above.
ANSWER: D
105. According to traditional approach, the average cost of capital _______________.
A. Remains constant up to a degree of leverage and rises sharply thereafter with every increase in
leverage
B. Rises constantly with increase in leverage
C. . Decrease up to certain point, remains unchanged for moderate increase in leverage and rises beyond
a certain point
D. Decrease at an increasing rate with increase in leverage
ANSWER: C
106. The cost of capital of a firm is ______________.
A. The dividend paid on the equity capital.
B. The weighted average of the cost of various long-term and short-term sources of finance.
C. The average rate of return it must earn on its investments to satisfy the various investors
D. The minimum rate of return it must earn on its investments to keep its investors satisfied.
ANSWER: C
107. The constant growth model of equity valuation assumes that _____________.
A. the dividends paid by the company remain constant.
B. the dividends paid by the company grow at a constant rate of growth.
C. the cost of equity may be less than or equal to the growth rate.
D. the growth rate is less than the cost of equity.
ANSWER: D
108. Cost of equity capital is ____________.
A. lesser than the cost of debt capital.
B. equal to the last dividend paid to the equity share holders
C. equal to the dividend expectations of equity share holders for the coming year
D. none of the above
ANSWER: D
109. Which of the following is not a feature of an optimal capital structure?
A. Safety.
B. Flexibility.
C. Control.
D. Solvency.
ANSWER: B
110. The overall capitalization rate and the cost of debt remain constant for all degrees of leverage. This is
pronounced by ______________.
A. Traditional approach
B. Net operating income approach
C. Net income approach
D. MM approach
ANSWER: C
111. While calculating weighted average cost of capital _________.
A. Retained earnings are excluded.
B. Cost of issues are included.
C. Weights are based on market value or on book value
D. Equity shares are given more weights.
ANSWER: D
112. The formula for cost of debt is
A. kd=(1/2+f-p)/f+p
B. f+p
C. f-P
D. fxp
ANSWER: A
113. Which of the following is / are assumption(s) underlying the Miller and Modigliani analysis?
A. Capital markets are perfect.
B. Investors are assumed to be rational and behave accordingly.
C. There is no corporate or personal income tax.
D. All of the above.
ANSWER: D
114. Which of the following is / are assumption behind the realized yield approach?
A. The yield earned by investors has been, on average, in conformity with their expectations.
B. The dividends will continue growing at a constant rate forever.
C. The market price will continue growing at a constant rate forever.
D. Both a and b.
ANSWER: D
115. Which of the following is not an assumption in the Miller & Modigliani approach?
A. There are no transaction costs.
B. Securities are infinitely divisible.
C. Investors have homogeneous expectations
D. All the firms pay tax on their income at the same rate.
ANSWER: D
116. Which of the following is/are true regarding cost of capital?
A. It is a measure of the returns required by all the suppliers of long-term finance.
B. It is equal to the Internal Rate of Return of a project if the projects Net Present Value is Zero.
C. It is the weighted arithmetic average of the cost of the various sources of long-term finance used.
D. Both b and c
ANSWER: D
117. While calculating the weighted average cost of capital, market value weights are preferred because
_________________.
A. Book value weights are historical in nature.
B. This is in conformity with the definition of cost of capital as the investors minimum required rate of
return.
C. Book value weights fluctuate violently.
D. Market value weights are fairly consistent over a period of time.
ANSWER: C
118. Cost of equity capital _____________.
A. Is lesser than the cost of debt capital.
B. Is equal to the dividend rate expectations of equity shareholders for the coming year.
C. Is equal to the dividend rate declared on equity shares.
D. Is equal to the return earned on equity capital
ANSWER: C
119. While calculating weighted average cost of capital _____________.
A. Preference shares are given more weight age.
B. Cost of issue is considered
C. Tax factor is ignored.
D. Risk factor is ignored.
ANSWER: B
120. Which of the following ratios is not affected by the financial structure and the tax rate of a company?
A. Net profit margin.
B. Earning power.
C. Earnings per share.
D. Capitalization rate
ANSWER: C
121. Which of the following is/are false regarding capital structure theory as stated by Miller and
Modigliani? 1) If agency costs are considered, the expected agency costs increases as the debt-equity ratio
decreases. 2) With the given assumptions, there is no optimal capital structure. 3) In the presence of taxes,
the market value of the firm decreases by the tax shield of debt
A. Only 1st statement.
B. Only 2nd statement..
C. Both 1st and 3rd statements.
D. All the three statements.
ANSWER: D
122. Which of the following factors influence(s) the capital structure of a business entity?
A. Bargaining power with the suppliers
B. Demand for the product of the company
C. Technology adopted
D. Adequate of the assets to meet any sudden spurt in demand.
ANSWER: C
123. Which of the following factors does not affect the capital structure of a company?
A. Cost of capital.
B. Composition of the current assets.
C. Size of the company
D. Expected nature of cash flows
ANSWER: B
124. Which of the following methods does a firm resort to avoid dividend payments?
A. Share splitting.
B. Declaring bonus shares.
C. Rights issue.
D. New issue.
ANSWER: B
125. The rational expectations model of dividend policy says that ______________.
A. Since the expectations of the investors are always rational, there will be no effect of dividend policy
on the valuation of the firm.
B. If the investors have rational expectations, they will value a dividend paying firm higher than a
non-dividend paying firm
C. If the declared dividend is in line with expectations of the investors, there will be no effect on the
valuation of the firm
D. If the declared dividend is in accordance with the expectations, the change in the firms value will be
minimal.
ANSWER: D
126. The Debt-Equity ratio of a Company_______________.
A. Affects its financial leverage.
B. Does not affect the Earnings Per Share.
C. Affects the dividend decision of the company.
D. None of the above.
ANSWER: D
127. Dividend changes are perceived important than the absolute level of dividends because ____.
A. management change dividends to protect their seats.
B. dividend changes have signal value for future.
C. MM state that absolute level of dividends is irrelevant.
D. changes determine the level of borrowing.
ANSWER: C
128. Walters model on dividend policy assumes that___________.
A. the firm offers an increasing amount of dividend per share at a given level of price per share
B. the firm has a finite life
C. the cost of capital of the firm is variable.
D. . equal to current assets plus current liabilities including bank borrowings.
ANSWER: D
129. Which of the following statement are true in respect of working capital?
A. Gross Working Capital is the sum of the total current assets.
B. Net working capital represents the margin on working capital supported by long-term funds.
C. Net working capital can be negative.
D. All the above.
ANSWER: D
130. Under trading means_______________.
A. Having low amount of working capital
B. High turnover of working capital
C. Sales are less compared to assets employed.
D. Low turnover of working capital.
ANSWER: D
131. Which of the following statement is true if the Net Present Value (NPV) of a positive?
A. Internal Rate of Return(IRR) is more than the cost of capital.
B. The pay-back period of the project is less than one year
C. Benefit cost ratio is less than unity.
D. Accepting the project has an indeterminate effect on shareholders
ANSWER: D
132. Financial management is indispensable in any organization as it helps in______________
A. taking sound financial decisions.
B. proper use and allocation.
C. improving the profitability of funds.
D. all the above
ANSWER: D
133. ________ decision relates to the determination of total amount of assets to be held in the firm.
A. Financing.
B. Investment.
C. Dividend .
D. Controlling.
ANSWER: D
134. Cost of capital is the ______ rate of return expected by the investor.
A. maximum.
B. average.
C. marginal.
D. minimum.
ANSWER: A
135. Effective cost of debentures is _________________-as compared to shares.
A. higher.
B. lower.
C. equal.
D. medium.
ANSWER: C
136. Ownership securities are represented by _________.
A. securities .
B. equities.
C. debt.
D. debentures .
ANSWER: B
137. Corporation is not a part of ---------------------finance
A. Public.
B. Private.
C. Public & private.
D. Organization.
ANSWER: D
138. Financial analysts,working capital means the same thing as __________.
A. total assets.
B. fixed assets.
C. current assets.
D. current assets minus current Liabilities.
ANSWER: D
139. Which of the following is a basic principle of finance as it relates to the management of working
capital?
A. Profitability varies inversely with risk
B. Liquidity moves together with risk.
C. Profitability moves together with risk.
D. Profitability moves together with liquidity.
ANSWER: C
140. Having defined working capital as current assets, it can be further classified according to __________.
A. Financing method and time
B. rate of return and financing method
C. time and rate of return
D. components and time
ANSWER: B
141. __________ is concerned with the acquisition, financing, and management of assets with some overall
goal in mind.
A. Financial management.
B. Profit maximization.
C. Agency theory.
D. Social responsibility.
ANSWER: A
142. __________ is concerned with the maximization of a firms earnings after taxes.
A. Shareholder wealth maximization
B. Profit maximization
C. Stakeholder maximization.
D. EPS maximization.
ANSWER: B
143. What is the most appropriate goal of the firm?
A. Shareholder wealth maximization.
B. Profit maximization.
C. Stakeholder maximization.
D. EPS maximization.
ANSWER: A
144. Shareholder wealth in a firm is represented by______________.
A. the number of people employed in the firm
B. the book value of the firm's assets less the book value of its liabilities
C. the amount of salary paid to its employees.
D. the market price per share of the firms common stock.
ANSWER: D
145. The long-run objective of financial management is to _________________.
A. maximize earnings per share.
B. maximize the value of the firms common stock.
C. maximize return on investment
D. maximize market share.
ANSWER: B
146. The market price of a share of common stock is determined by________________
A. the board of directors of the firm
B. the stock exchange on which the stock is listed.
C. the president of the company.
D. individuals buying and selling the stock.
ANSWER: D
147. This type of risk is avoidable through proper diversification_______________.
A. portfolio risk.
B. systematic risk.
C. unsystematic risk.
D. total risk.
ANSWER: A
148. .In proper capital budgeting analysis we evaluate incremental ____________.
A. accounting income.
B. cash flow.
C. earnings.
D. operating profit.
ANSWER: B
149. The term _____________ means mathematical relationship between two figures.
A. Income.
B. Expense.
C. Profit
D. Ratio.
ANSWER: D
150. EBIT is usually the same thing as_____________
A. funds provided by operations
B. earnings before taxes
C. net income
D. operating profit.
ANSWER: D


Some more MCQs in Finance for Practice

1. The financial goal of a public sector firm fully owned by the government is to?
A. Maximize the book value per share
B. Maximize the profits earned by the firm
C. Maximize the present value of stream of equity returns
D. Maximize the return on equity
ANSWER: C
2. Which of the following is not a function of a finance manager?
A. Mobilization of funds.
B. Deployment of funds.
C. Control over use of funds.
D. Manipulate share price of the company.
ANSWER: D
3. The market value of the firm is the result of?
A. Dividend decisions.
B. Working capital decisions
C. Trade-off between cost and risk.
D. Trade-off between risk and return.
ANSWER: D
4. Which of the following is related to the control function of the financial manager?
A. Interaction with the bankers for arranging a short-term loan
B. Comparing the costs and benefits if different sources of finance.
C. Analysis of variance between the targeted costs and actual costs incurred.
D. Assessing the costs and benefits of a project under consideration.
ANSWER: C
5. The minimum number of person to form a private limited company and a public limited company
respectively are?
A. 2 and 5
B. 5 and 7.
C. 2 and 7.
D. 7 and 2.
ANSWER: C
6. The present market price of a security which paid a dividend of Rs.5 is Rs.50. if the required rate of
return is 15% the price expected after one year is?
A. Rs.52.50.
B. Rs.55.00
C. Rs.57.50.
D. Rs.62.50.
ANSWER: A
7. A risk free stock has a beta of?
A. -1.
B. Zero.
C. 0.5.
D. 1.
ANSWER: B
8. If the expected rate of return on a portfolio consisting of two securities is 18.8% and the return on
one security ,which constitutes 30% of the portfolio is 16%, the return on the other security is?
A. 17%.
B. 18%.
C. 19%.
D. 19.8%.
ANSWER: D
9. Which of the following is not an assumption under CAPM?
A. Investors make their investment decision on a single period horizon.
B. If the perceived risk is high , a risk-average investor expects higher return.
C. The investors is not limited by his wealth and price of the asset.
D. Assets can be bought at the going market price.
ANSWER: C
10. If he slope of the security market line is zero which of the following is true?
A. Risk-free return = market return.
B. Market return expected return.
C. Expected return = risk-free return.
D. All of (a),(b) and(c) above.
ANSWER: D
11. If the coefficient correlation between x and y is 0.4, the covariance between them is 0.8 and
standard deviation of y is 0.2, variance of x would be ?
A. 0.01.
B. 0.1.
C. 10.
D. 100.
ANSWER: D
12. Which of the following is not a non diversifiable risk?
A. Lock out in a company due to workers demanding a wage hike.
B. Slump in the industry
C. Lack of strategy for the management in a company.
D. Both (a) and (c) above.
ANSWER: D
13. The amount of risk reduction depends on?
A. Degree of correlation.
B. Number of stocks in the portfolio.
C. The market index movement.
D. Both (a) and (b) above.
ANSWER: D
14. Which of the following is diversifiable risk?
A. Inflation risk
B. Interest-rate risk.
C. Market risk.
D. Business risk.
ANSWER: D
15. If a person holds a diversified portfolio the risk a security adds would be?
A. Specific risk.
B. Systematic risk.
C. Portfolio risk.
D. Liquidity risk.
ANSWER: B
16. Portfolio beta?
A. Is the risk of a diversified portfolio.
B. Is the weighted average of individual security betas, weights being the proportions of individual
returns
C. Is the weighted average of individual security betas , weight being the proportions of the
investments in the respective securities.
D. Both (a) and (c) above.
ANSWER: D
17. Which is true regarding Kj=rf + B (km-rf)?
A. rf can be the rate of return earned on gilt-edged securities.
B. Lower B would give a low risk premium.
C. There is a possibility that a zero beta exist
D. All of the above.
ANSWER: D
18. The securitys return plots below the SML. Then it can be said that ?
A. It is overpriced.
B. The required rate of return is much lower than the actual rate of return
C. The investors would try to buy more of the security
D. It is a defensive security.
ANSWER: A
19. A security is said to be aggressive when it?
A. Has a beta of > 1.
B. Plots on the upper part of SML.
C. Gives below average returns.
D. Both (a) and (b) above.
ANSWER: A
20. Which of the following is not a non diversifiable risk?
A. Interest rate risk.
B. Purchasing power risk.
C. Operating risk.
D. Market risk
ANSWER: C
21. Risk return trade off implies?
A. Increasing the portfolio of the firm through increased production.
B. Not taking any loans which increases the risk.
C. Not granting credit to risky Customers.
D. Taking decision in such a way which optimizes the balance between risk and return.
ANSWER: D
22. If the covariance of returns of a stock and markets is 514.92(%)2 and standard deviation of the
returns on the market is 16.25%, then the stock is?
A. 0.80.
B. 1.00.
C. 1.63.
D. 1.95.
ANSWER: D
23. Which of the following is a specific risk factor?
A. Market risk.
B. Inflation risk.
C. Interest rate risk.
D. Financial risk.
ANSWER: D
24. Risk premium in the capital Asset pricing model(CAPM) is given by?
A. Rf.
B. Km-Rf.
C. B(Km-Rf).
D. BKm.
ANSWER: C
25. The risk arising due to uncertainty about the time element and the price concession in selling a
security is called?
A. Price risk
B. Market risk.
C. Trading risk.
D. Liquidity risk.
ANSWER: D
26. Which of the following is not a diversifiable or specific risk factor?
A. Company strike.
B. Bankruptcy of a major supplier.
C. Death of a key company officer.
D. Industrial recession.
ANSWER: D
27. Mr.anil purchased 100 stocks of futura informatics ltd. For Rs.21 on march 15 sold for Rs.35 on
march 14 next year. In the company paid a dividend of Rs.2.50 per share them anil s holding period
return is?
A. 11.90%.
B. 45.40%.
C. 66.70%.
D. 78.60%.
ANSWER: D
28. The 182-day annualized T bills rate is 9%p.a the return on market is 15% p.a. and the beta of stock
B is1.5. the required rate of return from investment in stock B is?
A. 17% p.a.
B. 18%p.a.
C. 19%p.a.
D. 20%p.a.
ANSWER: B
29. Real rates of return are typically less than nominal rates of return due to?
A. Inflation.
B. Capital gains.
C. Dividend payment.
D. Deflation.
ANSWER: A
30. Real rates of return will be positive as long as?
A. The nominal return is positive
B. The inflation rate is positive.
C. The nominal return exceeds real return.
D. None of the above.
ANSWER: C
31. The major benefits of diversification is to?
A. Increase the expected return.
B. Increase the size of the investment portfolio.
C. Reduce brokerage commissions
D. Reduce the expected risk
ANSWER: D
32. If a stock is purchased for Rs.120 per share and held for one year during which time Rs.15 Per share
dividend is paid and the decreases Rs.115 the nominal rate of returns is?
A. 6.33%.
B. 8.33%.
C. 9.33%.
D. 10.33%.
ANSWER: B
33. The risk free rate of return is 8% the expected rate of return on market portfolio is 15% the beta of
eco board s equity stock is 1.4.the required rate on eco board s equity is ?
A. 15.4%.
B. 16.8%.
C. 17.2%.
D. 17.8%.
ANSWER: D
34. If the covariance of return from a stock and the market is(+) 221 (%)2 and the variance of return
from market is 121(%)2 the beta of the stock is?
A. 1.62.
B. 1.82.
C. 1.92.
D. 2.00.
ANSWER: B
35. If a security generates a cash flow of Rs6.25 at the end of holding period of 1 year the price of the
security at the beginning of 1 year was Rs.125 and the price of security at the end of 1 year is Rs.150
then of return from the security is?
A. 10%.
B. 15%.
C. 20%.
D. 25%.
ANSWER: D
36. Which of the following types of risks is/are not systematic risk?
A. Credit risk.
B. Interested rate risk.
C. Purchasing power risk.
D. Market risk.
ANSWER: A
37. If the return on a stock is 18% risk free rate is 6% and return on the market portfolio is 12 % then
the beta of the stock is?
A. 0.5.
B. 1.0.
C. 1.5
D. 2.0.
ANSWER: D
38. The covariance of the return from a stock with the return from the market is 7.40 and the variance
of the market portfolio is 4.80 what is the beta of the stock?
A. 1.54.
B. 3.40.
C. 4.80.
D. 6.10.
ANSWER: A
39. The risk that arises due to change in the purchasing power is called?
A. Financial risk
B. Interest rate risk.
C. Market risk.
D. Inflation risk
ANSWER: D
40. Thef risk aversion of an investor can be measured by?
A. Perfect positive correlation.
B. Perfect negative correlation
C. Moderate positive correlation
D. Moderate negative correlation.
ANSWER: D
41. If Rf = 8% = 1.5 ,Rm = 12% , then the expected Rate of Return according to CAPM is equal to
A. 10%.
B. 14%.
C. 18%.
D. 24%.
ANSWER: B
42. Which of the following types of risk is not a diversifiable risk ?
A. Business risk.
B. Financial risk
C. Credit risk
D. Purchasing risk.
ANSWER: D
43. If the return on a stock increases by 8% when the return on market increases by 12% , then the beta
of the stock is?
A. . 1.50
B. 1.20.
C. 0.75.
D. 0.67.
ANSWER: D
44. If a securitys return plots above the Security Market Line (SML) , then the security means?
A. Overpriced.
B. Un derricked.
C. Beta is more than 1.
D. Beta is less than 1.
ANSWER: B
45. If risk free rate of return is 10% , return on market portolio is 14% and return on a stock is 16% ,
then the beta of the stock is?
A. . 0.80.
B. 1.20.
C. 1.30.
D. 1.50.
ANSWER: D
46. If the covariance between the market return on the stock is 225% and the variance of return on the
market is 200% then the beta of the stock is?
A. 0.89.
B. 0.98.
C. 1.125
D. 1.521.
ANSWER: C
47. Characteristic line is the relationship between return on stock and?
A. Return on market portfolio.
B. Risk free of return.
C. Return on government
D. Both (b) and (c) above.
ANSWER: A
48. In becoming market the companies are to be selected with Beta?
A. Beta = 0
B. Beta > 1.
C. Beta < 1.
D. Beta = 1.
ANSWER: B
49. Systematic Risk Factor(S) involved in investing in bonds?
A. Purchase power risk.
B. Interest rate risk.
C. Yield rate risk.
D. Both a) and b) above
ANSWER: D
50. The relationship between of a security and required rate of return is represented by?
A. Characteristic line.
B. Security market line.
C. Capital market line.
D. All of the above.
ANSWER: B
51. .__________ is concerned with the acquisition, financing, and management of assets with some
overall goal in mind.
A. Financial management.
B. Profit maximization.
C. Agency theory.
D. Social responsibility.
ANSWER: A
52. Jensen and Meckling showed that __________ can assure themselves that the __________ will
make optimal decisions only if appropriate incentives are given and only if the __________ are
monitored.
A. Principals; agents; agents.
B. Agents; principals; principals.
C. Principals; agents; principals.
D. Agents; principals; agents.
ANSWER: A
53. .__________ is concerned with the maximization of a firm's earnings after taxes.
A. Shareholder wealth maximization
B. Profit maximization
C. Stakeholder maximization.
D. EPSmaximization.
ANSWER: B
54. What is the most appropriate goal of the firm?
A. Shareholder wealth maximization.
B. Profit maximization.
C. Stakeholder maximization.
D. EPSmaximization.
ANSWER: A
55. Which of the following statements is correct regarding profit maximization as the primary goal of
the firm?
A. Profit maximization considers the firm's risk level.
B. Profit maximization will not lead to increasing short-term profits at the expense of lowering
expected future profits
C. Profit maximization does consider the impact on individual shareholder's EPS.
D. Profit maximization is concerned more with maximizing net income than the stock price.
ANSWER: D
56. __________ is concerned with the branch of economics relating the behavior of principals and their
agents.
A. Financial management.
B. Profit maximization.
C. Agency theory
D. Social responsibility.
ANSWER: C
57. A concept that implies that the firm should consider issues such as protecting the consumer, paying
fair wages, maintaining fair hiring practices, supporting education, and considering environmental
issues.
A. Financial management.
B. Profit maximization.
C. Agency theory
D. Social responsibility.
ANSWER: D
58. Which of the following is not normally a responsibility of the treasurer of the modern corporation
but rather the controller?
A. Budgets and forecasts.
B. Asset management.
C. Investment management
D. Financing management.
ANSWER: A
59. The __________ decision involves determining the appropriate make-up of the right-hand side of
the balance sheet.
A. Asset management.
B. Financing.
C. Investment.
D. Capital budgeting.
ANSWER: B
60. To whom does the Treasurer most likely report?
A. Chief Financial Officer
B. Vice President of Operations.
C. Chief Executive Officer.
D. Board of Directors.
ANSWER: A
61. The authors of your textbook suggest that you need to understand financial management even if you
have no intention of becoming a financial manager. One reason is that the successful manager of the
not-too-distant future will need to be much more of a __________ who has the knowledge and ability to
move not just vertically within an organization but horizontally as well. Developing __________ will be
the rule, not the exception.
A. Specialist; specialties.
B. Generalist; general business skills.
C. Technician; quantitative skills.
D. Team player; cross-functional capabilities.
ANSWER: D
62. The __________ decision involves a determination of the total amount of assets needed, the
composition of the assets, and whether any assets need to be reduced, eliminated, or replaced
A. Asset management.
B. Financing.
C. Investment.
D. Accounting.
ANSWER: C
63. How are earnings per share calculated?
A. Use the income statement to determine earnings after taxes (net income) and divide by the
previous period's earnings after taxes. Then subtract 1 from the previously calculated value.
B. Use the income statement to determine earnings after taxes (net income) and divide by the number
of common shares outstanding
C. Use the income statement to determine earnings after taxes (net income) and divide by the number
of common and preferred shares outstanding
D. Use the income statement to determine earnings after taxes (net income) and divide by the
forecasted period's earnings after taxes. Then subtract 1 from the previously calculated value
ANSWER: C
64. According to the text's authors, what is the most important of the three financial management
decisions?
A. Asset management decision
B. Financing decision.
C. Investment decision
D. Accounting decision
ANSWER: C
65. The __________ decision involves efficiently managing the assets on the balance sheet on a day to
day basis, especially current assets
A. Asset management
B. Financing.
C. Investment.
D. Accounting
ANSWER: A
66. Which of the following is not a perquisite (perk)?
A. Company-provided automobile.
B. Expensive office.
C. Salary.
D. Country club membership.
ANSWER: C
67. Which of the following is not normally a responsibility of the controller of the modern corporation?
A. Budgets and forecasts.
B. Asset management
C. Financial reporting to the IRS.
D. Cost accounting.
ANSWER: B
68. All constituencies with a stake in the fortunes of the company are known as __________.
A. Shareholders.
B. Stakeholders.
C. Creditors.
D. Customers
ANSWER: B
69. Which of the following statements is not correct regarding earnings per share (EPS) maximization as
the primary goal of the firm?
A. EPSmaximization ignores the firm's risk level.
B. EPSmaximization does not specify the timing or duration of expected EPS.
C. EPSmaximization naturally requires all earnings to be retained.
D. EPSmaximization is concerned with maximizing net income.
ANSWER: D
70. .__________ is concerned with the maximization of a firms stock price.
A. Shareholder wealth maximization.
B. Profit maximization.
C. Stakeholder welfare maximization.
D. EPSmaximization
ANSWER: A
71. Corporate governance success includes three key groups. Which of the following represents these
three groups?
A. Suppliers, managers, and customers.
B. Board of Directors, executive officers, and common shareholders.
C. Suppliers, employees, and customers.
D. Common shareholders, managers, and employees.
ANSWER: B
72. The ShortHolder bank pays 5.60%, compounded daily (based on 360 days), on a 9-month certificate
of deposit. If you deposit $20,000 you would expect to earn around __________ in interest.
A. $840.
B. $858.
C. $1,032.
D. $1,121
ANSWER: B
73. With continuous compounding at 8 percent for 20 years, what is the approximate future value of a
$20,000 initial investment?
A. $52,000
B. $93,219
C. . $99,061.
D. $915,240.
ANSWER: C
74. .In 2 years you are to receive $10,000. If the interest rate were to suddenly decrease, the present
value of that future amount to you would __________.
A. Fall.
B. . Rise.
C. Remain unchanged.
D. The correct answer cannot be determined without more information
ANSWER: B
75. Assume that the interest rate is greater than zero. Which of the following cash-inflow streams
totaling $1,500 would you prefer? The cash flows are listed in order for Year 1, Year 2, and Year 3
respectively.
A. 700 $500 $300
B. 300 $500 $700
C. $500 $500 $500.
D. Any of the above, since they each sum to $1,500.
ANSWER: A
76. You are considering investing in a zero-coupon bond that sells for $500. At maturity in 8 years, it
will be redeemed for $1,000. During the life of the bond NO interest coupons will be paid. Using the
Rule of 72, what approximate annual rate of growth does this represent?
A. 8 percent.
B. . 9 percent.
C. 12 percent.
D. 25 percent.
ANSWER: B
77. To increase a given future value, the discount rate should be adjusted __________.
A. Upward
B. Downward.
C. First upward and then downward.
D. None of the above answers are correct; you should use PVIF
ANSWER: A
78. For $1,000 you can purchase a 5-year ordinary annuity which will pay you a yearly payment of
$263.80 for 5 years. What is the annual interest rate implicit in this investment to the nearest whole
percentage point?
A. 8 percent
B. 9 percent.
C. 10 percent.
D. . 11 percent.
ANSWER: C
79. You are considering borrowing $100,000 for 30 years at a compound annual interest rate of 9
percent. The loan agreement calls for 30 equal annual payments, to be paid at the end of each of the
next 30 years. (Payments include both principal and interest.) What is the annual payment that will fully
amortize the loan?
A. $3,333.33
B. $6,400.30
C. $9,733.63
D. $12,333.33
ANSWER: C
80. Interest paid (earned) on only the original principal borrowed (lent) is often referred to as
__________.
A. Present value
B. Simple interest.
C. Future value.
D. Compound interest.
ANSWER: B
81. Interest paid (earned) on both the original principal borrowed (lent) and previous interest earned is
often referred to as __________.
A. Present value.
B. Simple interest.
C. Future value
D. Compound interest.
ANSWER: D
82. You are going to place $12,500 into a certificate of deposit (CD) at a 6% annual rate (compounded
annually) with a maturity of 30 months. How much money will you receive when the CD matures?
A. Necessary information is not available to solve the problem
B. $14,460.
C. $14,491
D. . $14,518
ANSWER: B
83. Which of the following investment alternatives would provide the greatest ending wealth for your
investment?
A. 10% compounded daily (360 days).
B. 10.5% compounded annually.
C. 10.25% compounded quarterly.
D. There is not sufficient information to determine the best alternative from the above information.
ANSWER: C
84. Which of the following statements is most correct?
A. The future value of an annuity due is greater than an otherwise identical ordinary annuity.
B. A reduction in the discount rate will increase the future value of an otherwise identical cash flow
stream
C. Continuous compounding will result in a higher present value relative to an otherwise identical
investment that is compounded monthly at the same nominal rate.
D. The FVIFA (i%, N periods) equals the sum of the PVIF(i%, n) for n=1 to N periods
ANSWER: A
85. A set of possible values that a random variable can assume and their associated probabilities of
occurrence are referred to as __________.
A. Probability distribution.
B. The expected return.
C. The standard deviation
D. Coefficient of variation.
ANSWER: A
86. A statistical measure of the variability of a distribution around its mean is referred to as
__________.
A. A probability distribution.
B. The expected return.
C. The standard deviation
D. Coefficient of variation.
ANSWER: C
87. The ratio of the standard deviation of a distribution to the mean of that distribution is referred to as
__________.
A. a probability distribution.
B. the expected return.
C. the standard deviation.
D. coefficient of variation.
ANSWER: D
88. The weighted average of possible returns, with the weights being the probabilities of occurrence is
referred to as __________.
A. a probability distribution
B. the expected return.
C. the standard deviation.
D. coefficient of variation.
ANSWER: B
89. Clive Rodney Megabucks offers your friend, Yunyoung, an interesting gamble involving giving her the choice of the contents in one of two sealed, identical-looking boxes. One box has $20,000 in cash and the second has nothing inside. There is an equal probability that the chosen box contains cash versus nothing. Yunyoung states that she would not call off the gamble if you offered her a certain $4,999 instead of her choice of box. However, she would be indifferent if $5,000 was offered in place of the risky gamble; and she would definitely take $5,001 to call off the gamble. We would describe
Yunyoung as __________ in this instance.
A. being risk averse.
B. being risk indifferent.
C. having a risk preference
D. None of the above
ANSWER: A
90. Which of the following statements regarding covariance is correct?
A. Covariance always lies in the range -1 to +1.
B. Covariance, because it involves a squared value, must always be a positive number (or zero).
C. Low covariances among returns for different securities leads to high portfolio risk.
D. Covariances can take on positive, negative, or zero values.
ANSWER: D
91. Which of the following portfolio statistics statements is correct?
A. A portfolio's expected return is a simple weighted average of expected returns of the individual
securities comprising the portfolio.
B. portfolio's standard deviation of return is a simple weighted average of individual security return
standard deviations.
C. The square root of a portfolio's standard deviation of return equals its variance.
D. The square root of a portfolio's standard deviation of return equals its coefficient of variation.
ANSWER: A
92. Total portfolio risk is __________.
A. equal to systematic risk plus non-diversifiable risk
B. equal to avoidable risk plus diversifiable risk
C. equal to systematic risk plus unavoidable risk
D. equal to systematic risk plus diversifiable risk
ANSWER: D
93. __________ is the variability of return on stocks or portfolios not explained by general market
movements. It is avoidable through diversification.
A. Systematic risk
B. Standard deviation.
C. Unsystematic risk
D. Coefficient of variation.
ANSWER: C
94. .__________ is the variability of return on stocks or portfolios associated with changes in return on
the market as a whole.
A. Systematic risk.
B. Standard deviation.
C. Unsystematic risk
D. Coefficient of variation
ANSWER: A
95. Which of the following indexes would be most the appropriate proxy to measure the return of the
market portfolio in the CAPM?
A. Dow Jones Industrial Index.
B. Standard & Poor's 500.
C. Solomon Brothers Bond Index.
D. Wilshire Gold Index.
ANSWER: B
96. The __________ describes the linear relationship between expected rates of return for individual
securities (or portfolios) and __________.
A. characteristic line; standard deviation.
B. characteristic line; beta.
C. security market line; standard deviation.
D. security market line; beta.
ANSWER: D
97. The __________ describes the relationship between an individual security's returns and returns on
the market portfolio. The slope of this line is __________.
A. security market line; beta.
B. characteristic line; beta.
C. security market line; equal to +1.
D. characteristic line; equal to +1.
ANSWER: B
98. Which of the following items describes an index measure of systematic risk?
A. Beta
B. Standard deviation.
C. Coefficent of variation.
D. Variance.
ANSWER: A
99. Which of the following items is a model that describes the relationship between risk and expected
return (in this model the expected return is equal to the risk-free return plus a premium based on the
systematic risk of the security)?
A. . Beta.
B. Characteristic line.
C. Capital asset pricing model.
D. Efficient markets model.
ANSWER: C
100. What is the beta for an average risk security?What is the beta for a Treasury bill?
A. 1; 0.
B. . 0; 1
C. Greater than 1; 1
D. 1; Greater than 1.
ANSWER: A
101. Assume that a firm's common stock can be valued using the constant dividend growth model. As
an analyst you expect that the return on the market will be 15% and the risk-free rate is 7%. You have
estimated that the dividend next period will be $1.50, the firm will grow at a constant 6%, and the firm
beta is 0.50. The common stock is currently selling for $30.00 in the market place. Which of the
following statements is correct?
A. The firm's stock is over-priced
B. The firm's stock is fairly priced.
C. The firm's stock is under-priced.
D. The firm's stock cannot be valued because of missing information.
ANSWER: B
102. Which form of market efficiency states that current security prices fully reflect all information,
both public and private?
A. Weak.
B. Semi-strong.
C. Strong.
D. Very Strong
ANSWER: C
103. Which form of market efficiency states that current prices fully reflect the historical sequence of
prices?
A. Weak.
B. Semi-strong.
C. Strong.
D. Very Strong.
ANSWER: A
104. Which form of market efficiency states that current prices fully reflect all publicly available
information?
A. Weak.
B. Semi-strong.
C. Strong.
D. Very Strong
ANSWER: B
105. ._________ is concerned with the acquisition, financing, and management of assets with some
overall goal in mind.
A. Financial management
B. Profit maximization.
C. Agency theory
D. Social responsibility.
ANSWER: A
106. Jensen and Meckling showed that __________ can assure themselves that the __________ will
make optimal decisions only if appropriate incentives are given and only if the __________ are
monitored.
A. principals; agents; agents.
B. agents; principals; principals.
C. principals; agents; principals
D. agents; principals; agents.
ANSWER: D
107. .__________ is concerned with the maximization of a firm's earnings after taxes.
A. Shareholder wealth maximization
B. Profit maximization.
C. Stakeholder maximization.
D. EPSmaximization.
ANSWER: B
108. What is the most appropriate goal of the firm?
A. Shareholder wealth maximization.
B. Profit maximization.
C. Stakeholder maximization.
D. EPSmaximization.
ANSWER: A
109. Which of the following statements is correct regarding profit maximization as the primary goal of
the firm?
A. Profit maximization considers the firm's risk level.
B. Profit maximization will not lead to increasing short-term profits at the expense of lowering
expected future profits.
C. Profit maximization does consider the impact on individual shareholder's EPS.
D. Profit maximization is concerned more with maximizing net income than the stock price.
ANSWER: D
110. .__________ is concerned with the branch of economics relating the behavior of principals and
their agents.
A. Financial management
B. Profit maximization.
C. Agency theory.
D. Social responsibility.
ANSWER: C
111. A concept that implies that the firm should consider issues such as protecting the consumer, paying
fair wages, maintaining fair hiring practices, supporting education, and considering environmental
issues.
A. Financial management
B. Profit maximization.
C. . Agency theory.
D. Social responsibility.
ANSWER: D
112. Which of the following is not normally a responsibility of the treasurer of the modern corporation
but rather the controller?
A. Budgets and forecasts
B. Asset management.
C. Investment management.
D. Financing management.
ANSWER: A
113. The __________ decision involves determining the appropriate make-up of the right-hand side of
the balance sheet.
A. asset management.
B. Financing.
C. Investment.
D. capital budgeting.
ANSWER: B
114. To whom does the Treasurer most likely report?
A. . Chief Financial Officer.
B. Vice President of Operations.
C. Chief Executive Officer.
D. Board of Directors.
ANSWER: A
115. The authors of your textbook suggest that you need to understand financial management even if
you have no intention of becoming a financial manager. One reason is that the successful manager of
the not-too-distant future will need to be much more of a __________ who has the knowledge and
ability to move not just vertically within an organization but horizontally as well. Developing
__________ will be the rule, not the exception.
A. specialist; specialties.
B. generalist; general business skills.
C. technician; quantitative skills.
D. team player; cross-functional capabilities.
ANSWER: D
116. The __________ decision involves a determination of the total amount of assets needed, the
composition of the assets, and whether any assets need to be reduced, eliminated, or replaced.
A. asset management.
B. Financing.
C. Investment.
D. Accounting
ANSWER: C
117. How are earnings per share calculated?
A. Use the income statement to determine earnings after taxes (net income) and divide by the
previous period's earnings after taxes. Then subtract 1 from the previously calculated value.
B. Use the income statement to determine earnings after taxes (net income) and divide by the number
of common shares outstanding
C. Use the income statement to determine earnings after taxes (net income) and divide by the number
of common and preferred shares outstanding
D. Use the income statement to determine earnings after taxes (net income) and divide by the
forecasted period's earnings after taxes. Then subtract 1 from the previously calculated value
ANSWER: B
118. According to the text's authors, what is the most important of the three financial management
decisions?
A. Asset management decision.
B. Financing decision.
C. Investment decision.
D. Accounting decision
ANSWER: C
119. The __________ decision involves efficiently managing the assets on the balance sheet on a
day-to-day basis, especially current assets
A. asset management
B. Financing
C. Investment
D. Accounting.
ANSWER: A
120. Which of the following is not a perquisite (perk)?
A. Company-provided automobile.
B. Expensive office.
C. Salary.
D. Country club membership.
ANSWER: C
121. Which of the following is not normally a responsibility of the controller of the modern corporation?
A. Budgets and forecasts.
B. Asset management.
C. Financial reporting to the IRS
D. Cost accounting.
ANSWER: B
122. All constituencies with a stake in the fortunes of the company are known as __________.
A. Shareholders.
B. Stakeholders.
C. Creditors.
D. Customers.
ANSWER: B
123. Which of the following statements is not correct regarding earnings per share (EPS) maximization
as the primary goal of the firm?
A. EPSmaximization ignores the firm's risk level.
B. EPSmaximization does not specify the timing or duration of expected EPS.
C. EPSmaximization naturally requires all earnings to be retained.
D. EPSmaximization is concerned with maximizing net income.
ANSWER: D
124. .__________ is concerned with the maximization of a firms stock price.
A. Shareholder wealth maximization
B. Profit maximization.
C. Stakeholder welfare maximization.
D. EPSmaximization.
ANSWER: A
125. Corporate governance success includes three key groups. Which of the following represents these
three groups?
A. Suppliers, managers, and customers.
B. Board of Directors, executive officers, and common shareholders.
C. Suppliers, employees, and customers.
D. Common shareholders, managers, and employees.
ANSWER: B
126. The firm of Sun and Moon purchased a share of Acme.com common stock exactly one year ago
for $45. During the past year the common stock paid an annual dividend of $2.40. The firm sold the
security today for $85. What is the rate of return the firm has earned?
A. . 5.3%
B. 194.2%
C. 88.9%
D. 94.2%
ANSWER: A
127. A set of possible values that a random variable can assume and their associated probabilities of
occurrence are referred to as __________.
A. probability distribution.
B. the expected return.
C. the standard deviation
D. coefficient of variation.
ANSWER: A
128. A statistical measure of the variability of a distribution around its mean is referred to as
__________.
A. probability distribution
B. the expected return.
C. . the standard deviation
D. coefficient of variation.
ANSWER: C
129. The ratio of the standard deviation of a distribution to the mean of that distribution is referred to as
__________.
A. probability distribution.
B. the expected return
C. the standard deviation.
D. coefficient of variation.
ANSWER: D
130. The weighted average of possible returns, with the weights being the probabilities of occurrence is
referred to as __________.
A. a probability distribution.
B. the expected return.
C. the standard deviation.
D. . coefficient of variation
ANSWER: B
131. Clive Rodney Megabucks offers your friend, Melanie, an interesting gamble involving giving her
the choice of the contents in one of two sealed, identical-looking boxes. One box has $20,000 in cash
and the second has nothing inside. There is an equal probability that the chosen box contains cash
versus nothing. Melanie states that she would not call off the gamble if you offered her a certain
$10,999 instead of her choice of box. However, she would be indifferent if $11,000 was offered in place
of the risky gamble; and she would definitely take $11,001 to call off the gamble. We would describe
Melanie as __________ in this instance.
A. being risk averse.
B. being risk indifferent.
C. having a risk preference.
D. None of the above.
ANSWER: C
132. Clive Rodney Megabucks offers your friend, Yunyoung, an interesting gamble involving giving her
the choice of the contents in one of two sealed, identical-looking boxes. One box has $20,000 in cash
and the second has nothing inside. There is an equal probability that the chosen box contains cash
versus nothing. Yunyoung states that she would not call off the gamble if you offered her a certain
$4,999 instead of her choice of box. However, she would be indifferent if $5,000 was offered in place
of the risky gamble; and she would definitely take $5,001 to call off the gamble. We would describe
Yunyoung as __________ in this instance.
A. being risk averse.
B. being risk indifferent.
C. having a risk preference.
D. None of the above.
ANSWER: A
133. Total portfolio risk is __________.
A. equal to systematic risk plus nondiversifiable risk.
B. equal to avoidable risk plus diversifiable risk.
C. equal to systematic risk plus unavoidable risk.
D. equal to systematic risk plus diversifiable risk.
ANSWER: B
134. __________ is the variability of return on stocks or portfolios not explained by general market
movements. It is avoidable through diversification
A. Systematic risk.
B. Standard deviation
C. Unsystematic risk.
D. Coefficient of variation.
ANSWER: C
135. .__________ is the variability of return on stocks or portfolios associated with changes in return on
the market as a whole.
A. Systematic risk.
B. Standard deviation.
C. Unsystematic risk.
D. Coefficient of variation.
ANSWER: A
136. Which of the following indexes would be most the appropriate proxy to measure the return of the
market portfolio in the CAPM?
A. Dow Jones Industrial Index.
B. Standard & Poor's 500.
C. Solomon Brothers Bond Index.
D. Wilshire Gold Index.
ANSWER: B
137. The __________ describes the linear relationship between expected rates of return for individual
securities (or portfolios) and __________.
A. characteristic line; standard deviation.
B. characteristic line; beta.
C. security market line; standard deviation.
D. security market line; beta.
ANSWER: D
138. The __________ describes the relationship between an individual security's returns and returns on
the market portfolio. The slope of this line is __________.
A. security market line; beta.
B. characteristic line; beta.
C. security market line; equal to +1.
D. characteristic line; equal to +1.
ANSWER: B
139. Which of the following items describes an index measure of systematic risk?
A. Beta
B. Standard deviation
C. Coefficent of variation.
D. Variance
ANSWER: A
140. Which of the following items is a model that describes the relationship between risk and expected
return (in this model the expected return is equal to the risk-free return plus a premium based on the
systematic risk of the security)?
A. Beta.
B. Characteristic line.
C. Capital asset pricing model.
D. Efficient markets model.
ANSWER: C
141. What is the beta for an average risk security?What is the beta for a Treasury bill?
A. 1; 0.
B. 0; 1.
C. Greater than 1; 1.
D. . 1; Greater than 1.
ANSWER: A
142. Assume that a firm's common stock can be valued using the constant dividend growth model. As
an analyst you expect that the return on the market will be 15% and the risk-free rate is 7%. You have
estimated that the dividend next period will be $1.50, the firm will grow at a constant 6%, and the firm
beta is 0.50. The common stock is currently selling for $30.00 in the market place. Which of the
following statements is correct?
A. The firm's stock is over priced.
B. The firm's stock is fairly priced.
C. The firm's stock is under priced.
D. The firm's stock cannot be valued because of missing information
ANSWER: B
143. Which form of market efficiency states that current security prices fully reflect all information,
both public and private?
A. Weak.
B. Semi-strong.
C. Strong.
D. Very strong.
ANSWER: C
144. Which form of market efficiency states that current security prices fully reflect all information,
both public and private?
A. Weak
B. Semi-strong.
C. Strong.
D. Very strong.
ANSWER: C
145. Which form of market efficiency states that current prices fully reflect the historical sequence of
prices?
A. Weak.
B. Semi-strong.
C. Strong.
D. Very strong.
ANSWER: A
146. Which form of market efficiency states that current prices fully reflect all publicly available
information?
A. Weak.
B. Semi-strong.
C. Strong.
D. Very strong.
ANSWER: B
147. Which of the following examples best represents a passive dividend policy?
A. The firm sets a policy such that the proportion of dividends paid from net income remains
constant.
B. The firm pays dividends with what remains of net income after taking acceptable investment
projects
C. The firm sets a policy such that the quantity (dollar amount per share) of dividends paid from net
income remains constant
D. All of the above are examples of various types of passive dividend policies.
ANSWER: B
148. Modigliani and Miller argue that the dividend decision __________.
A. is irrelevant as the value of the firm is based on the earning power of its assets.
B. is relevant as the value of the firm is not based just on the earning power of its assets.
C. is irrelevant as dividends represent cash leaving the firm to shareholders, who own the firm
anyway.
D. is relevant as cash outflow always influences other firm decisions.
ANSWER: A
149. Financial signaling has been raised as an argument in the battle over the relevancy of dividends.
Which of the following statements concerning dividends is most likely to be voiced by someone using
the financial signaling argument?
A. A dividend decrease should be viewed by investors as "good news." The dividend decrease acts to
add conviction to the statement that the firm has better uses for the earnings of the company than the
stockholders.
B. Reported accounting earnings of a company, not dividends, are a proper reflection or signal of the
company's economic earnings.
C. The price of a firm's stock should react unfavorably to an increase in dividends
D. Cash dividends speak louder than words when it comes to conveying information about
management's expectations of the future.
ANSWER: D
150. A number of legal rules help to establish the legal boundaries within which a firm's finalized
dividend policy can operate. These legal rules have to do with capital impairment, insolvency, and
undue retention of earnings. Some states have a (an) __________ rule, while the Internal Revenue
Service has a (an) __________ rule.
A. capital impairment; insolvency.
B. undue retention of earnings; insolvency.
C. insolvency rule; capital impairment.
D. capital impairment (or insolvency); undue retention of earnings.
ANSWER: D
151. Firm Pickemon, Inc. has had earnings of $3.20, $3.00, and $5.50 per share for the past three years.
The firm anticipates maintaining the same dividend policy this year as the past three years. That
dividend policy has resulted in dividends per share of $1.28, $1.20, and $2.20 for the past three years. It
is anticipated that the next year will result in a large increase in earnings to $9.80 per share. What
dividend do you expect the firm to pay in the next year?
A. $3.92.
B. $1.56.
C. $3.12
D. $4.68.
ANSWER: A
152. Investors may be willing to pay a premium for stable dividends because of the informational
content of __________, the desire of investors for __________, and certain __________.
A. institutional considerations; dividends; current income.
B. dividends; current income; institutional considerations.
C. current income; dividends; institutional considerations.
D. institutional considerations; current income; dividends
ANSWER: B
153. Because ofvarious governmental bodies prepare approved (or legal) lists of securities in which
certain institutions (like pension funds) may invest, companies whose securities appear on these lists
__________.
A. will think twice before cutting or eliminating a dividend because that will cause them to be
removed from the lists
B. do not have to worry about whether they pay a dividend or not because they have been
pre-approved
C. will want to follow a strictly passive dividend policy
D. are legally authorized to substitute stock dividends for cash dividends.
ANSWER: A
154. A(n) __________ is a payment of additional shares to shareholders in lieu of cash
A. stock split.
B. stock dividend.
C. extra dividend.
D. regular dividend
ANSWER: B
155. A(n) __________ occurs when there is an increase in the number of shares outstanding by
reducing the par value of stock.
A. stock split.
B. stock dividend.
C. extra dividend.
D. regular dividend.
ANSWER: A
156. A(n) __________ is the expected cash dividend that is normally paid to shareholders
A. stock split.
B. stock dividend.
C. extra dividend.
D. regular dividend.
ANSWER: D
157. __________ is a nonrecurring dividend paid to shareholders in addition to the regular dividend
A. A stock split
B. A stock dividend.
C. An extra dividend.
D. A regular dividend.
ANSWER: C
158. What method of stock repurchase occurs when the buyer seeks bids within a specified price range
and accepts the lowest price that will allow it to acquire the entire block of securities desired?
A. Dutch-auction.
B. Fixed-price.
C. Open-market.
D. Fair-warning.
ANSWER: A
159. What method of stock repurchase occurs when the buyer purchases securities through a brokerage
house?
A. Dutch-auction
B. Fixed-price.
C. Open-market
D. Fair-warning.
ANSWER: C
160. The shareholders of your firm anticipate receiving a regular dividend that is consistent with past
dividend policies. What benefit occurs to shareholders if the firm repurchases shares with the same total
quantity of money that would have been spent on dividends? Assume that the P/E ratio is maintained
with either scenario.
A. Shareholders can postpone or reduce taxes (assuming a lower capital gain rate).
B. It is cheaper for shareholders to sell existing shares for cash than it costs to reinvest cash dividends
into existing shares.
C. The current shareholders benefit because there are a greater number shareholders than if the firm
pays a cash dividend.
D. There is no benefit as shareholders will not be receiving any cash.
ANSWER: A
161. A dividend reinvestment plan (DRIP) is __________.
A. an optional plan, provided by brokerage firms, allowing shareholders to automatically reinvest
dividend payments in additional shares of the firm's stock.
B. an optional plan, provided by large corporate firms, allowing shareholders to automatically
reinvest dividend payments in additional shares of the firm's stock
C. a mandatory plan, provided by brokerage firms, where shareholders are automatically reinvesting
dividend payments in additional shares of the firm's stock at a reduced price
D. a mandatory plan, provided by large corporate firms, where shareholders are automatically
reinvesting dividend payments in additional shares of the firm's stock at a reduced price.
ANSWER: B
162. The Board of Directors announces the amount and date of the next dividend on the __________
date; while the __________ date is the first date on which the purchaser of a stock is no longer entitled
to the recently declared dividend
A. declaration; record.
B. ex-dividend; record.
C. declaration; ex-dividend.
D. payment; record
ANSWER: C
163. Which of the following is not a reason that DeStore.com would prefer to pay a stock dividend
rather than a regular cash dividend?
A. It decreases the supply of shares and enhances shareholder wealth
B. It may conserve cash for other firm needs
C. It will reduce the stock price into what management perceives as a more beneficial trading range
D. It may convey information about the firm to investors that it cannot convey credibly otherwise
ANSWER: A
164. According to the authors of your text, the repurchase of stock is considered __________ decision
rather than __________ decision.
A. an investment; a financing
B. . a financing; an investment
C. an investment; a dividend.
D. a dividend; a financing
ANSWER: B
165. Large percentage stock dividends are typically __________ percent or higher of previously
outstanding common stock.
A. 25.
B. 35
C. 51.
D. 70.
ANSWER: A
166. The __________ is the proportion of earnings that are paid to common shareholders in the form of
a cash dividend.
A. retention rate.
B. 1 plus the retention rate.
C. growth rate.
D. dividend payout ratio.
ANSWER: D
167. Which of the following provides a judicial review of a mergers-decision made by the OFT, CC or
Secretary of State for Trade and Industry?
A. Secretary of State for Trade and Industry
B. Competitim Appeal Tribunal (CAT).
C. Competition Commission.
D. Office of Fair Trading (OFT).
ANSWER: B
168. For the next five questions match each of the following descriptions of a type of merger or
acquisition with its correct term. Involving a firm in the same business and at the same stage of
production.
A. Lateral integration
B. Conglomerate integration.
C. Horizontal integration.
D. Organic growth
ANSWER: C
169. Involving a firm in a totally unrelated business
A. Conglomerate integration.
B. Organic growth.
C. Backward vertical integration
D. Forward integration.
ANSWER: A
170. Towards the final consumer.
A. Forward integration.
B. Horizontal integration.
C. Lateral integration.
D. Organic growth.
ANSWER: A
171. Involves firms in different product areas, but with some common elements (e.g. common factor
inputs or product.
A. Backward vertical integration.
B. Lateral integration.
C. Organic growth.
D. Conglomerate integration.
ANSWER: B
172. Towards the raw material supplier.
A. Forward vertical integration.
B. Backward vertical integration.
C. Lateral integration.
D. Organic growth.
ANSWER: B
173. A firm that acquires another firm as part of its strategy to sell off assets, cut costs, and operate the
remaining assets more efficiently is engaging in __________.
A. strategic acquisition.
B. financial acquisition.
C. two-tier tender offer.
D. shark repellent.
ANSWER: B
174. A would-be acquirer's offer to buy stock directly from shareholders is referred to as __________.
A. a white knight.
B. a joint venture
C. a tender offer.
D. a takeover
ANSWER: C
175. The restructuring of a firm should be undertaken if __________.
A. the restructuring is expected to create value for shareholders
B. the restructuring is expected to increase earnings per share (EPS) next year.
C. the restructuring is expected to increase the firm's market share power within the industry.
D. the current employees will receive additional stock options to align employee interest.
ANSWER: A
176. Economies of scale, market share dominance, and technological advances are reasons most likely
to be offered to justify a.
A. financial acquisition
B. strategic acquisition.
C. Divestiture
D. supermajority merger approval provision.
ANSWER: B
177. Answer : B 189.Suppose that the market price per share of Company A is $100 and that of
Company B is $40. If A offers one-half (1/2) a share of common stock for each share of B, the
exchange ratio with respect to market prices would be __________.
A. 0.40.
B. 0.80.
C. 1.25.
D. . 2.50.
ANSWER: C
178. .A reason suggested by the authors for a divestiture, such as a sell-off or spin-off, is __________.
A. Synergy.
B. Reverse synergy.
C. Hubris.
D. Economies of scale.
ANSWER: B
179. What is the most likely reason that a firm (who is highly profitable) might consider acquiring a firm
that has had large recent losses and will continue to have losses into the near future?
A. Hubris.
B. White knight.
C. Tax-loss usage
D. Increase assets.
ANSWER: C
180. Richard Roll makes a case with the __________ hypothesis that takeovers are motivated by bidder
pride and confidence in their abilities relative to others.
A. Synergy
B. management success.
C. efficient markets.
D. Hubris.
ANSWER: D
181. A merger that signals to the investors in the market place a change in strategy or operating
efficiency that can not be conveyed in another manner is referred to as __________.
A. the information effect.
B. the wealth effect.
C. strategic effect
D. bootstrapping effect.
ANSWER: A
182. A firm that acquires another firm as part of its overall business strategy is engaging in __________.
A. strategic acquisition.
B. financial acquisition.
C. two-tier tender offer.
D. vertical acquisition.
ANSWER: A
183. The average takeover premium a target firm has historically received is closest to which of the
following percentages?
A. 5%.
B. 12%.
C. . 30%.
D. 80%.
ANSWER: C
184. What remains after we subtract operating costs and capital expenditures necessary to at least
sustain cash flows from total firm revenues?
A. Earnings before interest and taxes (EBIT).
B. Net income.
C. Strategic cash flows.
D. Free cash flows.
ANSWER: D
185. How should a successful acquisition be evaluated in the long-run?
A. The acquisition is successful if the market price of the acquirer's stock increases over what it
would have been without the acquisitions.
B. The acquisition is successful if the acquirer is able to diversify its asset base and reduce its overall
risk.
C. The acquisition is successful if the acquirer is able to reduce its debt-to-total asset ratio, and hence
risk, relative to what it would have been without the acquisition.
D. The acquisition is successful if the acquirer is able to increase its earnings per share ( EPS),
relative to what it would have been without the acquisition The acquisition is x.
ANSWER: D
186. To financial analysts, "gross working capital" means the same thing as ________.
A. fixed assets.
B. current assets.
C. working capital.
D. cost of capital
ANSWER: B
187. To financial analysts, "gross working capital" means the same thing as ________.
A. plus its receivable turnover in days (RTD).
B. minus its RTD.
C. plus its RTD minus its payable turnover in days (PTD).
D. minus its RTD minus its PTD.
ANSWER: A
188. The process of convergence of accounting standards around the world aims to .
A. narrow or remove national accounting differences.
B. move non-US accounting standards towards.
C. US Generally Accepted Accounting Principles (US GAAP).
D. create one set of rules-based accounting standards for all countries.
ANSWER: A
189. Shareholder wealth" in a firm is represented by.
A. the number of people employed in the firm.
B. the book value of the firm's assets less the book value of its liabilities.
C. . the amount of salary paid to its employees.
D. the market price per share of the firm's common stock
ANSWER: D
190. What are the earnings per share (EPS) for a company that earned $100,000 last year in after-tax
profits, has 200,000 common shares outstanding and $1.2 million in retained earnings at the year end?
A. $100,000
B. . $6.00
C. $0.50
D. $6.50
ANSWER: C
191. would be an example of a principal, while a(n) would be an example of an agent.
A. Shareholder; manager.
B. Manager; owner
C. Accountant; bondholder.
D. Shareholder; bondholder.
ANSWER: A
192. . If an investment banker has agreed to sell a new issue of securities on a best-efforts basis, the
issue
A. most likely involves an unusually large stock offering
B. most likely involves bonds instead of common stock
C. results in no assumption of underwriting risk by the investment banker.
D. most likely involves a well-established, large company
ANSWER: C
193. The actual market value of a right will differ from its theoretical value for all of the following
reasons EXCEPT for.
A. the size of the firm's marginal tax rate
B. the amount of transactions costs incurred.
C. . investor speculation
D. the irregular exercise and sale of rights over the subscription period.
ANSWER: A
194. . In calculating the value of one right when the stock is selling "rights-on," the analyst needs to
know the number of rights needed to buy one share of stock and
A. . the subscription price per share.
B. the transactions costs involved.
C. the price-earnings ratio of the firm's stock
D. the length of the rights offering period.
ANSWER: A
195. To say that there is "asymmetric information" in the issuing of common stock or debt means that
A. investors have nearly perfect information
B. the markets have nearly perfect information
C. investors have more accurate information than management has.
D. . management has more accurate information than investors have
ANSWER: D
196. A best efforts offering is sometimes used in connection with a of new, long-term securities.
A. private placement
B. privileged subscription.
C. public issue.
D. all of the above.
ANSWER: C
197. A company can ensure the complete success of a rights offering by making use of a .
A. standby arrangement.
B. oversubscription privilege.
C. green shoe provision
D. shelf registration.
ANSWER: A
198. Financial intermediaries
A. do not invest in new long-term securities
B. include insurance companies and pension funds.
C. include the national and regional stock exchanges
D. are usually underwriting syndicates.
ANSWER: B
199. Financial intermediaries
A. a goodwill gesture by a "white knight".
B. a would-be acquirer's friendly takeover attempt
C. a would-be acquirer's offer to buy stock directly from shareholders.
D. viewed as sexual harassment when it occurs in the workplace
ANSWER: A
200. Recent accounting changes in the US
A. eliminated the purchase method, allowing only the pooling-of-interests method for mergers and
acquisitions
B. eliminated the pooling-of-interests method, allowing only the purchase method for mergers and
acquisitions
C. allow for both the purchase method and the pooling-of-interests method for mergers and
acquisitions.
D. outlawed the recording of goodwill for any merger or acquisition
ANSWER: B
201. Which asset-liability combination would most likely result in the firm's having the greatest risk of technical insolvency?
A. Increasing current assets while lowering current liabilities
B. Increasing current assets while incurring more current liabilities
C. Reducing current assets, increasing current liabilities, and reducing long-term debt.
D. Replacing short-term debt with equity.
ANSWER: C
202. Which of the following illustrates the use of a hedging (or matching) approach to financing?
A. Short-term assets financed with long-term liabilities
B. Permanent working capital financed with long-term liabilities
C. Short-term assets financed with equity
D. All assets financed with a 50 percent equity, 50 percent long-term debt mixture
ANSWER: B
203. Financing a long-lived asset with short-term financing would be.
A. an example of "moderate risk -- moderate (potential) profitability" asset financing
B. . an example of "low risk -- low (potential) profitability" asset financing
C. an example of "high risk -- high (potential) profitability" asset financing.
D. an example of the "hedging approach" to financing.
ANSWER: C
204. Net working capital refers to
A. total assets minus fixed assets.
B. current assets minus current liabilities.
C. current assets minus inventories
D. current assets
ANSWER: B
205. Permanent working capital.
A. varies with seasonal needs.
B. includes fixed assets.
C. . is the amount of current assets required to meet a firm's long-term minimum needs.
D. includes accounts payable.
ANSWER: C
206. Spontaneous financing includes.
A. accounts receivable.
B. accounts payable
C. short-term loans
D. a line of credit
ANSWER: B
207. ___________ varies inversely with profitability.
A. Liquidity
B. Risk
C. Blue.
D. False.
ANSWER: A
208. In deciding the appropriate level of current assets for the firm management is confronted with
A. a trade off between profitability and risk
B. a trade off between liquidity and marketability.
C. a trade off between equity and debt.
D. Trade off between current assets and profitability.
ANSWER: A
209. Which of the following would be consistent with a more aggressive approach to financing working
capital?
A. Financing short-term needs with short-term funds.
B. Financing permanent inventory build-up with long-term debt
C. Financing seasonal needs with short-term funds
D. Financing some long-term needs with short-term funds
ANSWER: D
210. In finance, working capital means the same thing as.
A. total assets.
B. fixed assets.
C. current assets.
D. current assets minus current liabilities
ANSWER: C
211. A company can ensure the complete success of a rights offering by making use of a .
A. standby arrangement.
B. oversubscription privilege.
C. green shoe provision.
D. shelf registration
ANSWER: D
212. permits what is known as a shelf registration.
A. SEC Rule 144
B. SEC Rule 144a
C. SEC Rule 415.
D. SEC Form 13D.
ANSWER: A
213. In a common stock rights offering the subscription price is generally.
A. set equal to the current market price of the stock
B. set below the current market price of the stock.
C. set above the current market price of the stock.
D. set after the stock goes ex-rights
ANSWER: B
214. A preliminary prospectus is known as a.
A. Golden parachute.
B. Red herring
C. Blue sky.
D. Green shoe.
ANSWER: A
215. Letter stock is.
A. A handwritten certificate representing a corporate IOU
B. Amass mailing offering a security for sale.
C. Securities issued by the United States Postal Service.
D. Privately placed common stock that cannot be immediately resold to the general public.
ANSWER: A
216. The main focus of finance for the last 40 years has been.
A. Mergers and acquisitions.
B. Conglomerate firms.
C. Inflation.
D. Risk-return relationships.
ANSWER: A
217. The mix of debt and equity in a firm is referred to as the firms.
A. Primary capital.
B. Capital composition.
C. Cost of capital.
D. Capital structure.
ANSWER: D
218. The allocation of capital is determined by.
A. expected rates of return.
B. the Bank of Canada.
C. the initial sale of securities in the primary market.
D. the size of the federal debt.
ANSWER: A
219. Capital is allocated by financial markets by.
A. A lottery system between investment dealers.
B. Pricing securities based on their risk and expected future cash flows.
C. By pricing risky securities higher than low-risk securities.
D. By a government risk-rating system based on AAA for low risk and CCC for high risk.
ANSWER: B
220. Agency theory examines the.
A. Relationship between the owners and managers of the firm.
B. Insurability of the firms assets.
C. Relationship between dividend policy and firm value.
D. Value of the firm relative to other firms in the industry.
ANSWER: A
221. A main benefit to the corporate form of organization is.
A. Double taxation of corporate income.
B. Simplicity of decision making and low organizational complexity.
C. Limited liability for the corporate shareholders.
D. A major management role exists for the firm's owners.
ANSWER: C
222. Which of the following are not among the daily activities of financial management?
A. Sale of shares and bonds.
B. Credit management.
C. Inventory control.
D. The receipt and disbursement of funds.
ANSWER: A
223. The ultimate measure of performance is.
A. amount of the firms earnings.
B. the how the earnings are valued by the investor.
C. the firms profit margin.
D. return on the firm's total assets.
ANSWER: B
224. The field of finance is closely related to the fields of.
A. statistics and economics.
B. statistics and risk analysis.
C. economics and accounting.
D. accounting and comparative return analysis.
ANSWER: C
225. The controllers responsibilities are primarily in nature, while the treasurers responsibilities are
primarily related to
A. operational; financial management.
B. financial management; accounting.
C. accounting; financial management.
D. financial management; operations.
ANSWER: C
226. Retained earnings for the base year equals 100.0 percent. You must be looking at.
A. common-size balance sheet.
B. common-size income statement.
C. indexed balance sheet.
D. indexed income statement.
ANSWER: C
227. A company can improve (lower) its debt to total assets ratio by doing which of the following?
A. Borrow more.
B. Shift short-term to long-term debt.
C. Shift long-term to short-term debt.
D. Sell common stock.
ANSWER: D
228. . Which of the following would NOT improve the current ratio?
A. Borrow short term to finance additional fixed assets.
B. Issue long-term debt to buy inventory.
C. Sell common stock to reduce current liabilities.
D. Sell fixed assets to reduce accounts payable.
ANSWER: A
229. . ___________ refers to meeting the needs of the present without compromising the ability of
future generations to meet their own needs.
A. Corporate Social Responsibility (CSR).
B. Sustainability
C. Convergence.
D. Green Economics.
ANSWER: B
230. The decision function of financial management can be broken down into the decisions.
A. financing and investment.
B. investment, financing, and asset management.
C. financing and dividend
D. capital budgeting, cash management, and credit management.
ANSWER: B
231. The long run objective of financial management is to
A. Maximize earnings per share.
B. Maximize the value of the firm's common stock.
C. Maximize return on investment.
D. Maximize market share.
ANSWER: A
232. The __________ decision involves efficiently managing the assets on the balance sheet on a day to
day basis especially current assets.
A. asset management.
B. Financing.
C. Investment.
D. Accounting.
ANSWER: C
233. To whom does the Treasurer most likely report?
A. Chief Financial Officer.
B. Vice President of Operations.
C. Chief Executive Officer
D. Board of Directors.
ANSWER: A
234. __________ is concerned with the maximization of a firms earnings after taxes
A. Shareholder wealth maximization.
B. Profit maximization.
C. Stakeholder maximization.
D. EPS maximization
ANSWER: A
235. .__________ is concerned with the acquisition financing and management of assets with some
overall goal in mind
A. Financial management.
B. Profit maximization.
C. Agency theory.
D. Social responsibility.
ANSWER: A
236. What is a business organizational model that involves the large-scale outsourcing of business
functions?
A. Virtual corporation.
B. Joint venture.
C. Corporate liquidation.
D. Equity carve-out.
ANSWER: D
237. Which one of the following creates a brand new firm by merging existing entities?
A. Acquisition of stock
B. Merger.
C. Shared agreement.
D. Consolidation.
ANSWER: D
238. Which one of the following statements is correct?
A. With a consolidation, the acquiring firm keeps its legal existence but the acquired firm does not.
B. The acquiring firm acquires the assets, but not the liabilities, of the acquired firm in a merger.
C. When Babco acquired Sitco it was most likely a consolidation because the combined firm's name
was Basit.
D. The key difference between a merger and a consolidation is that a merger creates an entirely new
firm whereas a consolidation does not
ANSWER: C
239. Which one of the following is a transaction which must be approved by a formal vote of the
shareholders of the selling firm and which when completed leaves the selling firm as a corporate shell?
A. Consolidation
B. Merger.
C. Acquisition of stock.
D. Acquisition of assets.
ANSWER: B
240. The title for each asset owned by the acquired, or target, firm must be officially transferred in
which one of the following?
A. Acquisition of assets
B. Tender offer.
C. Merger.
D. Acquisition of stock.
ANSWER: A
241. A merger in which an entirely new firm is created and both the acquired and acquiring firms cease
to exist is called a:.
A. Divestiture
B. Consolidation.
C. Tender offer.
D. Spin off.
ANSWER: B
242. A public offer by one firm to directly buy the shares of another firm is called a:.
A. Merger.
B. Consolidation.
C. Tender offer
D. Spinoff.
ANSWER: C
243. . The acquisition of a firm in the same industry as the bidder is called a _____ acquisition
A. Conglomerate.
B. Forward.
C. Backward.
D. Horizontal.
ANSWER: D
244. An attempt to gain control of a firm by soliciting a sufficient number of stockholder votes to
replace the current board of directors is called a:.
A. Tender offer
B. Proxy contest.
C. Going-private transaction.
D. Leveraged buyout.
ANSWER: B
245. A business deal in which all publicly owned stock in a firm is replaced with complete equity
ownership by a private group is called a:.
A. Tender offer.
B. Proxy contest.
C. Going-private transaction.
D. Leveraged buyout.
ANSWER: C
246. The positive incremental net gain associated with the combination of two firms through a merger or
acquisition is called:.
A. The agency conflict.
B. Goodwill
C. The merger cost.
D. The consolidation effect.
ANSWER: D
247. . A contract wherein the bidding firm agrees to limit its holdings in the target firm is called a:.
A. Supermajority amendment
B. Standstill agreement.
C. Greenmail provision
D. Poison pill amendment
ANSWER: B
248. . If Microsoft were to acquire U.S. Airways, the acquisition would be classified as a _____
acquisition
A. Horizontal.
B. Longitudinal.
C. Conglomerate
D. Vertical.
ANSWER: C
249. A reason for acquisitions is synergy. Synergy includes
A. Revenue enhancements.
B. Cost reductions.
C. Lower taxes.
D. . All of the above
ANSWER: D
250. . Firm A and Firm B join to create Firm AB. This is an example of
A. A tender offer.
B. An acquisition of assets.
C. An acquisition of stock.
D. A consolidation.
ANSWER: D