MCQ Flashcards by Mariami Mamasakhlisi

The difference between an ordinary annuity and an annuity due is:
a. the interest rate
b. the timing of the payments
c. the amount of the payments
d. the number of periods

b. the timing of the payments

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The primary objective of the firm is:
a. Shareholder wealth maximization
b. Social responsibility
c. Long run survival
d. Profit maximization

a. Shareholder wealth maximization

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_____ arise from the divergent objectives between owners and managers.
a. Shareholder relationships
b. Stakeholder problems
c. Creditor problems
d. Agency problems

d. Agency problems

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The values shown in ordinary annuity tables (either present value or compound value) can be adjusted
to the annuity due form by _________ the ordinary annuity interest factor by ______.
a. dividing, (1 + i)
b. dividing, (1 + i)n
c. multiplying, (1 + i)
d. multiplying, (1 + i)n

c. multiplying, (1 + i)

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The effective rate of interest will always be _______ the nominal rate.
a. greater than
b. equal to
c. less than
d. equal to or greater than

d. equal to or greater than

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Shareholder wealth is measured by the __________.
a. book value of the shareholders’ ordinary share capital
b. market value of the shareholders’ ordinary share capital
c. book value of the company’s assets
d. market value of the company’s assets

b. market value of the shareholders’ ordinary share capital

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There is often a divergence between the shareholder wealth maximization goal and the actual goals
pursued by management. The primary reason for this is __________.
a. geographical dispersion of shareholders
b. separation of ownership and control
c. age differences between managers and shareholders
d. none of the above

b. separation of ownership and control

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The existence of divergent objectives between owners and managers is one example of a class of
problems arising from __________.
a. social responsibility concerns
b. age differences between managers and owners
c. agency relationships
d. none of the above

d. none of the above

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The most important managerial objective is to:
a. make MC=MR
b. maximize profits
c. minimize agency costs
d. none of the above

d. none of the above

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The present value of a single amount can be represented as
a. PV0 = FVn(PVIFi,n)
b. PV0 = FVn(PVIFAi,n)
c. PV0 = FVn[1/(1 + i)n]
d. a and c

d. a and c
PV0 = FVn(PVIFi,n)
PV0 = FVn[1/(1 + i)n]

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An annuity due is one in which
a. payments or receipts occur at the end of each period.
b. payments or receipts occur at the beginning of each period.
c. payments or receipts occur forever.
d. cash flows occur continuously.

b. payments or receipts occur at the beginning of each period.

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The more frequent the compounding the
a. greater the present value
b. greater the amount deposited
c. greater the effective interest rate
d. lesser the future value

c. greater the effective interest rate

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The annual effective rate of interest (ieff ) is a function of:
a. the annual nominal rate of interest (inom)
b. the number of compounding intervals per year (m)
c. the number of years (n)
d. a and b

d. a and b
a. the annual nominal rate of interest (inom)
b. the number of compounding intervals per year (m)

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The major factors that determine the market value of a company’s shares include the __________ .
a. risk of its cash flows
b. timing of its cash flows
c. book value of its assets
d. a and b

d. a and b
a. risk of its cash flows
b. timing of its cash flows

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The limitations of the profit maximization goal include:
a. It lacks a time dimension (i.e., it is static)
b. It fails to consider risk
c. The definition of profit is ambiguous
d. All of the above are limitations

d. All the above are limitations
a. It lacks a time dimension (i.e., it is static)
b. It fails to consider risk
c. The definition of profit is ambiguous

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The shareholder wealth maximization goal states that management should seek to maximize the
_______ of the expected future returns to the owners of the firm.
a. Future value
b. Compound value
c. Percentage value
d. Present value

d. Present value

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Shareholder returns can take the form of
a. Periodic dividend payments
b. Proceeds from the sale of the stock
c. Periodic interest payments
d. a and b

d
a. Periodic dividend payments
b. Proceeds from the sale of the stock

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Shareholder wealth is measured by the ________ of the shareholders’ common stock holdings.
a. Book value
b. Market value
c. Historic value
d. Compound value

b. Market value

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The most widely accepted objective of the firm is to
a. minimize risk
b. maximize profits
c. maximize shareholder wealth
d. maximize earnings per share

c. maximize shareholder wealth

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The ______ the risk of receiving future cash flows, the ______ will be the present value of those cash
flows.
a. greater, greater
b. greater, lower
c. lower, lower
d. none of the above

b. greater, lower

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The primary reason for the divergence between the shareholder wealth maximization goal and the
actual goals pursued by management has been attributed to
a. separation of social responsibility and stakeholders’ concerns
b. separation of ownership and control
c. separation of personal welfare and long-run profit goals
d. the granting of “golden parachute” contracts

b. separation of ownership and control

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_____ arise from the divergent objectives between owners and managers.
a. Shareholder relationships
b. Stakeholder problems
c. Creditor problems
d. Agency problems

d. Agency problems

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Agency problems may give rise to costs that ______ the market value of firms.
a. increase
b. decrease
c. do not affect
d. none of the above

b. decrease

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____ equals the number of shares outstanding times the market price per share.
a. Book value
b. Stakeholders wealth
c. Total shareholder wealth
d. Economic value

c. Total shareholder wealth

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The present value of a single amount can be represented as a. PV0 = FVn(PVIFi,n) b. PV0 = FVn(PVIFAi,n) c. PV0 = FVn[1/(1 + i)n] d. a and c

a. PV0 = FVn(PVIFi,n)

The basic future value equation is given by a. FVn = PV0(PVIFi,n) b. FVn = PV0(FVIFAi,n) c. FVn = PV0(1/(1+ i)n) d. FVn = PV0(FVIFi,n)

d. FVn = PV0(FVIFi,n)

The process of finding present values is frequently called a. annualizing b. compounding c. discounting d. leasing

c. discounting

The values shown in the present value ordinary annuity tables can be adjusted to the annuity due form by _________ the ordinary annuity interest factor by ______. a. dividing, (1 + i) b. dividing, (1 + i)n c. multiplying, (1 + i) d. multiplying, (1 + i)n

c. multiplying, (1 + i)

A(n) __________ is a financial instrument that agrees to pay an equal amount of money per period into the indefinite future (i.e. forever) a. annuity b. annuity due c. sinking fund d. perpetuity

d. perpetuity

Finding the discounted current value of €1,000 to be received at the end of each of the next 5 years requires calculating the a. future value of an annuity b. future value of an annuity due c. present value of an annuity d. present value of an annuity due

c. present value of an annuity

The present value of an ordinary annuity is the a. sum of the present value of a series of equal periodic payments b. future value of an equal series of payments c. receipt of equal cash flows for a specified amount of time d. sum of the future value of an equal series of payments

a. sum of the present value of a series of equal periodic payments

When a loan is amortized over a five year term, the a. rate of interest is reduced each year b. amount of interest paid is reduced each year c. payment is reduced each year d. balance is paid as a balloon payment in the fifth year

b. amount of interest paid is reduced each year

The more frequent the compounding the a. greater the present value b. greater the amount deposited c. greater the effective interest rate d. lesser the future value

c. greater the effective interest rate

The effective rate of interest will always be _______ the nominal rate. a. greater than b. equal to c. less than d. equal to or greater than

d. equal to or greater than

there is often a divergence between the shareholder wealth maximization goal and the actual goals pursued by management. What is the primary reason for this?

The principal-agent problem – separation of ownership and control.

What type of investment in a company allows an investor to vote at the company’s AGM (Annual General Meeting)?

Ordinary share capital

Name two capital investment appraisal techniques that incorporate the time value of money into their analysis

Net present value Internal rate of return Discounted payback period Capital rationing Profitability index

Name two factors that could affect a firm's level of investment in working capital.

Possible answers: Industry the company is in Economic factors Working capital cycle/ cash cycle Working capital policies Efficiency of working capital management Volume of business Impact of inflation

Salamanca Plc has identified five potential projects that will add value to the firm. However it does not have sufficient funds to invest in all five projects. What capital investment appraisal technique should it use to choose which projects to invest in?

Capital rationing

If a firm uses only short-term debt to finance the fluctuating level of current assets, what type of approach to working capital management is the firm adopting?

aggressive approach

The process of finding present values is frequently called: a. discounting b. leasing c. annualising d. compounding

a. discounting

Financial Management decision making refers to making decisions about: a. Project and asset investment b. Methods and sources of finance c. Distribution of profits d. All of the above

d. All of the above

The the risk of receiving future cash flows, the will be the present value of those cash flows. a. Lower, lower b. Lower, greater c. Greater, greater d. None of the above

b. Lower, greater

Shareholder returns can take the form of: a. Proceeds from the sale of the stock b. A and D c. Periodic interest payments d. Periodic dividend payments

b. A and D

Which of the following is not a mechanism to control management agency problems? a. Creating incentives for profit maximization such as annual bonuses b. Separating the roles of chairman and chief executive officer c. Having remuneration and audit committees in place d. Appointing non-executive directors to the board of a company

a. Creating incentives for profit maximization such as annual bonuses

The financial risk of a firm refers to the: a. The use of fixed cost resources in operations as opposed to variable cost resources b. Variability in the price of a firm’s securities c. Increased variability in a firm’s earnings due to the use of variable-cost financing d. Increased variability in a firm’s earnings due to the use of fixed-cost financing

d. Increased variability in a firm’s earnings due to the use of fixed-cost financing

The difference between an ordinary annuity and an annuity due is the: a. Amount of the cash flows b. The discount rate used for valuation c. The timing of the payments d. The number of periods

c. The timing of the payments

Shareholder wealth is measured by: a. Book value of the company’s assets b. Book value of the shareholders’ ordinary share capital c. Market value of the shareholders’ ordinary share capital d. Market value of the company’s assets

c. Market value of the shareholders’ ordinary share capital

The less frequent the compounding, the the fair value of the deposit, and the is the effective interest rate. a. Greater, greater b. Greater, lesser c. Lesser, greater d. Lesser, lesser

d. Lesser, lesser

A financial instrument that agrees to pay an equal amount of money per period into the indefinite future (i.e. forever) is known as: a. A sinking fund b. A perpetuity c. A common annuity d. An annuity due

b. A perpetuity

Shareholder returns can take the form of: a. Periodic interest payments b. Proceeds from the sale of the stock c. Periodic dividend payments d. B and C

d. B and C

A financial instrument that agrees to pay an equal amount of money per period into the indefinite future (i.e. forever) is known as: a. An annuity due b. A common annuity c. A perpetuity d. A sinking fund

c. A perpetuity

Financial Management decision making refers to making decisions about: a. Project and asset investment b. Methods and sources of finance c. Distribution of profits d. All of the above

d. All of the above

The financial risk of a firm refers to the: a. Increased variability in a firm’s earnings due to the use of fixed-cost financing b. Increased variability in a firm’s earnings due to the use of variable-cost financing c. Variability in the price of a firm's securities d. The use of fixed cost resources in operations as opposed to variable cost resources

a. Increased variability in a firm’s earnings due to the use of fixed-cost financing

The the risk of receiving future cash flows, the will be the present value of those cash flows. a. Greater, greater b. Lower, greater c. Lower, lower d. None of the above

b. Lower, greater

The difference between an ordinary annuity and an annuity due is the: a. Amount of the cash flows b. The discount rate used for valuation c. The timing of the payments d. The number of periods

c. The timing of the payments

c. Market value of the shareholders’ ordinary share capital

The process of finding future values is frequently called: a. discounting b. leasing c. annualising d. compounding

d. compounding

The less frequent the compounding, the the fair value of the deposit, and the is the effective interest rate. a. Greater, greater b. Greater, lesser c. Lesser, greater d. Lesser, lesser

d. Lesser, lesser

Which of the following is not a mechanism to control management agency problems? a. Appointing non-executive directors to the board of a company b. Create incentives for profit maximization such as annual bonuses c. Separating the roles of chairman and chief executive officer d. Having remuneration and audit committees in place

b. Create incentives for profit maximization such as annual bonuses

A financial instrument that agrees to pay an equal amount of money per period for a set amount of periods (e.g. for 5 years) is known as: a. A sinking fund b. A perpetuity c. An annuity d. A share option

c. An annuity

The role of a financial manager tends to involve focus on _______, whereas a financial accountant’s role tends to focus on _______. a. Profit maximisation; shareholder wealth maximisation b. The past; the future c. Shareholders; stakeholders d. The future; the past

d. The future; the past

Which of the following would be considered to be stakeholders of a firm? a. Employees, managers, government b. Suppliers, customers, lenders c. Shareholders only d. All of the above parties are stakeholders

d. All of the above parties are stakeholders

One of the risk’s faced by an investor in debt-type securities is that his/her investment may rank below other securities in terms of claims on cash flow and assets. This is referred to as: a. Seniority risk b. Maturity risk c. Flight risk d. Marketability risk

a. Seniority risk

The _______ the risk of receiving a return from a company’s shares, the _______ the return a potential investor will require to compensate for that risk: a. Greater; lower b. Lower; greater c. Greater; greater d. None of the above

c. Greater; greater

The ultimate owners of a firm are: a. Creditors b. The board of directors c. Management d. The shareholders

d. The shareholders

Shareholder wealth maximization is _______ in nature, whereas profit maximisation tends to be more _______ in nature: a. Short-term; long-term b. Long-term; short-term c. Medium-term, short-term d. None of the above

b. Long-term; short-term

The process of finding present values is frequently called: a. compounding b. leasing c. annualising d. discounting

d. discounting

The principal-agent problem in firms arises due to the fact that _______ are the principals in a firm, while _______ are agents of the principal. a. Shareholders; managers b. Directors; managers c. Managers; shareholders d. Managers; employees

a. Shareholders; managers

Investors typically require compensation for: a. Time value of money b. Expected inflation c. Risk d. All of the above

d. All of the above

Payments for a common annuity occur at the _______ of the year, and payments for an annuity due occur at the _______ of the year. a. End; end b. Beginning; end c. Mid-point; end d. End; beginning

d. End; beginning

The process of finding present values is frequently called: a. discounting b. leasing c. annualising d. compounding

a. discounting

Financial Management decision making refers to making decisions about: a. Project and asset investment b. Methods and sources of finance c. Distribution of profits d. All of the above

d. All of the above

The _______ the risk of receiving future cash flows, the _______ will be the present value of those cash flows. a. Lower, lower b. Lower, greater c. Greater, greater d. None of the above

b. Lower, greater

Shareholder returns can take the form of: a. Proceeds from the sale of the stock b. A and D c. Periodic interest payments d. Periodic dividend payments

b. A and D

a. Creating incentives for profit maximization such as annual bonuses

d. Increased variability in a firm’s earnings due to the use of fixed-cost financing

The difference between an ordinary annuity and an annuity due is the: a. Amount of the cash flows b. The discount rate used for valuation c. The timing of the payments d. The number of periods

c. The timing of the payments

c. Market value of the shareholders’ ordinary share capital

The less frequent the compounding, the _______ the fair value of the deposit, and the_______ is the effective interest rate. a. Greater, greater b. Greater, lesser c. Lesser, greater d. Lesser, lesser

d. Lesser, lesser

b. A perpetuity

The shareholder wealth maximisation goal states that management should seek to maximise the _______ of the expected future returns to the owners of the firm. a. Percentage value b. Future value c. Present value d. Compound value

c. Present value

There is often a divergence between the shareholder wealth maximisation goal and the actual goals pursued by management. The primary reason for this is __________. a. separation of social responsibility and stakeholders’ concerns b. separation of ownership and control c. separation of personal welfare and long-run profit goals d. that both have their own agendas

b. separation of ownership and control

Financial Management decision making refers to making decisions about: a. Project and asset investment b. Methods and sources of finance c. Distribution of profits d. All of the above

d. All of the above

The business risk of a firm refers to the: a. variability in the firm's operating earnings over time b. results from using fixed-cost sources of funds c. variability in the price of a firm's securities d. influence of government regulations on business earnings

a. variability in the firm's operating earnings over time

Investors require compensation for: a. The time value of money b. Inflation c. Risk d. All of the above

d. All of the above

Finding the discounted current value of €5,000 to be received at the beginning of each of the next 5 years requires calculating the: (Version 2: End of the year) a. Future value of an annuity b. Future value of an annuity due c. Present value of an annuity d. Present value of an annuity due

d. Present value of an annuity due

An annuity due is one in which : a. Payments or receipts occur at the end of each period b. Payments or receipts occur at the beginning of each period c. Payments or receipts occur forever d. Cash flows occur continuously

b. Payments or receipts occur at the beginning of each period

The process of finding present values is frequently called: (Version 2: Future values) a. discounting b. leasing c. annualising d. compounding

a. discounting

When is the effective interest rate equal to the nominal interest rate? a. Always b. When compounding occurs annually c. When compounding occurs monthly d. Never

b. When compounding occurs annually

Which of the following is not a mechanism to control management agency problems? a. Linking managerial reward to shareholder wealth maximisation b. Linking managerial rewards to profit maximisation c. Monitoring managerial behaviours d. Linking managerial promotion to shareholder wealth maximization

b. Linking managerial rewards to profit maximisation