Financial Management

Question 0

Para Co. Is reviewing the following data relating to an energy saving investment proposal:
Cost $50,000
Residual value (5yrs end) 10,000
PV of an A of 1 at 12% (5yrs) 3.60
PV of 1 due in 5yrs at 12% 0.57

What would be the annual savings needed to make the investment realize a 12% yield?

A. $8,189
B. $11,111
C. $12,306
D. $13,889

Answer 0

C. $12,306

“A”(3.60)= $50,000-$10,000(.57)
“A”=$44,300/3.60
“A”=$12,306

Question 1

Which one of the following is a contract that states the terms of a bond issued by a corporation? 
A. Indenture
B. Debenture
C. Advice
D. Certificate

Answer 1

A. Indenture

Question 2

Which of the following cash management techniques focuses on cash disbursements?
A. Lock-box system
B. Zero-balance account
C. Pre-authorized checks
D. Depository transfer checks

Answer 2

B. Zero-balance account

Question 3

In evaluating the economic feasibility of a capital project, the discount rate (hurdle rate) must be determined in advance when using the: 
A. Payback period method 
B. Accounting rate of return method 
C. Net present value method 
D. Internal rate of return method

Answer 3

C. Net Present value method

Question 4

Which of the following is the annual rate of interest applicable when not taking trade credit terms of "2/10,net 30?
A. 2.00%
B. 24.00%
C. 36.00%
D. 36.73%

Answer 4

D. 36.73%

APR= interest/principle * 1/time fraction of year

    =.02/.98 * 1/(20/360)
    = .0204 * (360/20)
    = 36.73%

Question 5

Which of the following factors is inherent in a firm’s operations if it utilizes only equity financing?

A. Financial risk
B. Business risk
C. Interest rate risk
D. Marginal risk

Answer 5

B. Business risk

Question 6

Which one of the following measures would be least appropriate in evaluating working capital management?
A. Inventory turnover ratio
B. Quick ratio
C. Days' sales in average receivables.
D. Return on assets.

Answer 6

D. Return on Assets (ROA)

Question 7

Which one of the following is most likely not a major concern when selecting short-term investment opportunities?
A. Safety of Principal
B. Rate of return
C. Price Stability 
D. Marketability

Answer 7

B. Rate of return

Question 8

Which one of the following shows the basic approach used to capitalize earnings to determine the value of a business?
A. Annual revenue x required rate of return.
B. Annual earnings X required rate of return.
C. Annual earnings / required rate of return.
D. Annual revenue / required rate of return.

Answer 8

C. Annual earnings / Required rate of return.

Question 9

Which of the following metrics equates the present value of a project's expected cash inflows to the present value of the project's expected costs?
A. Net Present value
B. Return on assets 
C. Internal rate of return
D. Economic value-added

Answer 9

C. Internal rate of return

Question 10

The market price of a bond issued at a premium is equal to the present value of its principal amount…
A. Only, at the states interest rate
B. And the present value of all future interest payments, at the stated interest rate
C. Only, at the market (effective) interest rate
D. And the present value of all future interest payments, at the market (effective) interest rate.

Answer 10

D. And the present value of all future interest payments, at the market (effective) interest rate.

• the market price of a bond, whether issued at par, premium, or discount, will be the present value of the principal amount plus the present value of future interest payments, all at the market (effective) rate of interest.

Question 11

Which combination of changes in asset turnover and income as a percentage of sales will maximize the return on investment?
Asset turn over   Income as a%of sales 
A.  Increase.        Decrease
B.  Increase.        Increase
C.  Decrease.       Increase
D. Decrease.        Decrease

Answer 11

B. Increase

Question 12

The stock of Fargo Co. is selling for $85. The next annual dividend is expected to be $4.25 and is expected to grow at a rate of 7%. The corporate tax rate is 30%. What percentage represents the firm's cost of common equity?
A. 12.0%
B. 8.4%
C. 7.0%
D. 5.0%

Answer 12

A. 12.0% = ($4.24/$85)+ .07

• The firms cost of common equity is the rate of return currently expected by potential investors in the firm’s common stock. CSER = (dividend/market price) + Growth Rate

Question 13

Which one of the following constitutes (measures) the operating cycle of an entity? 
A. A/P conv. cycle + AR conv. Cycle
B. Inv. conv. cycle  + A/P conv. Cycle
C. Inv. Conv. Cycle + Cash conv. Cycle
D. Inv. Conv. Cycle + A/R conv. Cycle

Answer 13

D. Inv. Conv. Cycle + A/R conv. Cycle